Franchise Fees

Mr DL van Dam – Franchise lawyer 

A subject that is invariably included in the franchise agreement for both the franchisee and the franchisor concerns the franchise fees, often referred to as the franchise fee. In practice, various methods are used to determine the amount and basis of that fee. For example, the fee can be expressed as a percentage of turnover, as a percentage of the franchisee’s total purchases or as a fixed amount. The distinction between gross and net concepts can also often make a difference. 

In general it cannot be said that one calculation is “better” than the other. The method of calculating the fee is highly dependent on the sector. What might be considered perfectly reasonable and customary in one franchise organization could be considered totally unacceptable in another franchise organization. However, there is one greatest common denominator that can and should be used as a touchstone against all methods of fee calculation: the franchisee must, taking into account the entire financial structure of his company, also after full payment of his fee obligations towards the franchisor have sufficient margin. in order, firstly, to be able to meet its other obligations, and secondly, to be able to generate an entrepreneurial income that is customary and acceptable in the sector concerned.

In many cases, the criterion described above will already be discussed with the bank when applying for financing. The business plan to be submitted by the franchisee in that context will of course include the fee obligations. In that case, the bank will first verify whether these obligations are in accordance with the anticipated turnover and results of the company concerned. If the franchisor is a member of the Dutch Franchise Association, then that association will also have a critical eye on the fee obligations, in particular compared to what the franchise organization offers in return. Incidentally, a somewhat more diffuse subject is touched upon here: in practice, franchisees often complain that the franchisor’s package of services is not in accordance with the amount of the fee obligations. Of course, a problem can arise for a franchisor if it turns out that it does not comply with what has been agreed between the franchisee and the franchisor. However, if the franchisor adequately complies with the franchise agreement, then the principle of freedom of contract should be reverted to in the first instance. No law or rule of law precludes agreeing on a high fee obligation in the eyes of the franchisee involved.

Partly in light of the above, it is therefore so important for all parties involved to check in advance whether the fee obligations are in proper proportion to the financial structure in general of the franchise company, preferably before entering into a contract. If questions arise about this to the prospective franchisee, it stands to reason that he should submit this to his potential franchisor. At that time, in the absence of agreement on this point, it can still be decided not to enter into the agreement or to bring the fee obligations into line with the wishes of the franchisee. After signing, everything is considerably more nuanced. 

Ludwig & Van Dam franchise attorneys, franchise legal advice