Legal Blog

Franchise Facts: Franchise Fees – I Have to Pay What? | Part 2

In my last post, I discussed several different types of franchise fees, including initial fees, royalty fees, and national brand fees.  In this post, I will discuss coop fees, as well as some additional fees to look out for.

Coop Fees. Many franchise agreements also contain fees for coops, which are regional groups formed for marketing purposes. Coops can help franchisees pool resources to engage in more effective local and regional advertising. However, franchisees must understand what percentage of their sales will be required for coop fees.  Franchisees should also check to see if amounts spent on coop advertising are credited to local advertising requirements, or whether coop advertising is in addition to local fees. New franchise systems typically do not have coop fees, because the system is not mature enough to warrant them. However, franchisees should be careful to read the franchise agreement regarding these fees. Most franchise agreements allow a franchisor to impose coops at some point in the future. As a result, a coop fee is one of those “surprise fees” that can sneak up later.

Transfer Fees. Most franchise agreements also contain fees that are collected in the event of a transfer or sale of the business. There is a wide variety of transfer fees among franchise systems. Some are high, and some are nominal. Franchisees must know what events trigger such a fee. Are transfer fees triggered if one owner transfers his interest to another owner?  What if there is no change of control in the entity? What if the transfer is due to the death of an owner? Franchisees will also want to know whether the purchaser will be charged a new franchise fee at the time of the transfer. The selling franchisee will want to consider all of this when setting a sale price for the franchise.

Miscellaneous Fees. In addition to the above fees, franchisees must be aware of other fees and startup costs that may be required. For example, many franchisors require “Grand Opening” expenditures. These expenditures can be in the tens of thousands of dollars.  Some franchisors also require the purchase of marketing materials, either as a start-up package or as an ongoing requirement. It is important to know all of these fees, in addition to any other fees that may be charged for computers, software, training, conferences, and other similar fees.

Hidden Fees.  Finally, franchisees must also be aware of “hidden” fees that can be implemented later. For example, some budding franchisors may opt not to charge a national marketing fee while they are in their infancy. As discussed above, many franchisors do not charge a coop fee early on either, because there are not enough franchises in existence. However, franchisees must know whether the franchisor can require these additional fees later, as the system develops. The potential for these fees may not be widely known in the system, so it is vital to review the franchise agreement to understand what can be charged.

As a franchise attorney, people frequently ask me whether the fees charged by the franchisor are too high or too low. This is a tough question and one that I usually cannot answer. Fees are just another expense of the business and need to be considered along with other costs of doing business. Franchisors may charge higher fees for different reasons. For example, some franchisors take on certain duties for the franchisees, such as payroll and collection functions.  Some franchisors may take on all scheduling tasks for their franchisees. In those cases, a franchisee’s other expenses would do down, making a higher fee structure possible. Judging franchise fees in a vacuum is not easy and requires a review of the entire business.

 

If you have any questions about this topic or any other franchise law issue, please contact Brian Loffredo at bloffredo@offitkurman.com.

 

ABOUT BRIAN LOFFREDO

bloffredo@offitkurman.com | 301.575.0345

Brian is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.

In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.

Brian also has extensive experience representing financial institutions with workouts, collections and residential / commercial foreclosures.

 

 

 

ABOUT OFFIT KURMAN

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