Franchise Fees In New Zealand: A Complete Guide

Franchising your business in New Zealand is a strategic approach to grow your brand through the establishment of various branches. This growth model leverages the efforts of franchisees, allowing you to focus your limited time on overarching brand expansion strategies.

The franchisee’s operation within their exclusive territory enables your brand to engage directly with clients in that area, reducing the need for your direct involvement.

Before You Start…

If you’re considering starting a franchise in New Zealand, as the franchisor, you must contemplate several factors before proceeding.

Costs

There are various legal and operational costs involved in establishing and maintaining a franchising relationship. It’s crucial to understand these financial obligations before finalising any agreements, and it’s your responsibility to determine if the benefits justify these costs. We’ll delve into these costs shortly.

Control

Franchising your business means relinquishing some control over the day-to-day operations of that particular branch. While you’ll still manage the overall systems and processes, your influence on daily activities may be limited.

This is why there are fees charged to the franchisee for the rights to operate a part of your business, along with protections to support the relationship between you and the franchisee. Below, we provide more information on the fees you can charge and how they can alleviate the control you relinquish when franchising.

Franchise Agreements

It’s essential to understand your Franchise Agreement and the clauses that can aid you. This document outlines the written obligations and protections binding you and the franchisee.

Code Of Conduct And Other Documents

In New Zealand, it’s important to be familiar with the Franchise Association of New Zealand (FANZ) and its Code of Practice and Code of Ethics, which provide a framework for fair and ethical franchising practices. As a franchisor, you have an obligation to act in good faith in your dealings with franchisees.

There have also been recent changes to the Fair Trading Act and the Commerce Act that you should be aware of. These changes may affect your ability to pass on certain legal costs associated with the franchising agreement and other documents. It’s advisable to consult with a legal professional to ensure compliance with current legislation.

Further information on related legal documents can be found here.

Franchisor Costs

Now that you’re informed about the benefits and critical considerations of franchising, it’s time to familiarise yourself with the associated costs. Understanding these costs will help you decide if franchising is the right expansion strategy for your business.

The list below is not exhaustive, and there are many other legal costs related to managing your franchising arrangement. Changes in legislation may influence whether some of these costs can be passed on to the franchisee.

Agreement Costs

You’ll need to account for costs associated with drafting the franchising agreement, including any amendments or reviews by your lawyer.

Legal Costs

As a franchisor, you may need to provide the following items, each incurring a cost for creation and administration:

Breach notice – informs the franchisee of a breach of the agreement
Termination notice – notifies the franchisee of your intention to terminate the agreement
Renewal documents – facilitates a renewed term

What Fees Can I Charge As Franchisor?

Please note that the following list is not exhaustive, and depending on your arrangement with the franchisee, other fees such as license fees for running services may apply.

For instance, if the franchise is a restaurant, it may require a license to serve alcohol, and if you administer this, you can charge the fee to the franchisee.

Initial Fee

This is typically a lump sum charged to the franchisee upfront upon signing the contract to establish the franchising relationship. The franchisee can record this cost as an intangible asset and include it as a business asset for accounting purposes.

Documentation Fee

The legal costs you incurred when drafting the documents for the franchising relationship can be passed onto the franchisee as a documentation fee. However, due to legislative changes, you must ensure this is specified in the franchising agreement and that this fixed fee is paid before the franchisee begins their business.

Ongoing Franchise Fee

As the franchise benefits from your business’s trade secrets and systems, you can charge an ongoing fee for this advantage. This fee, also known as a royalty, varies for each agreement and can be charged as a percentage of annual turnover or a fixed amount for the contract duration. It is generally paid at regular intervals, such as monthly or weekly.

It’s beneficial to have clauses in your Franchise Agreement that outline actions in case the franchisee fails to pay. More information on ongoing franchising fees can be found here.

Marketing Fee

To increase your business’s visibility, you’ll likely engage in marketing activities on behalf of all your franchises. This could include trade shows, promotions, social media campaigns, website management, and more. These efforts enhance your brand’s profile, which benefits the franchises.

Therefore, you can charge this fee to your franchisees as it ultimately aids them in attracting customers. Franchisors might also establish a marketing fund, pooling contributions from franchisees for collective marketing efforts.

Training Fee

This fee covers the cost of training provided to the franchisee on how to operate the business. Whether this is a one-time upfront fee or an ongoing charge is at your discretion. Ongoing training fees can be claimed by the franchisee as a business expense, and spreading the cost over time might be more manageable.

Supervision Fee

In certain scenarios, such as when equipment and branding need to be installed, you can charge a supervision fee. For example, in the hospitality industry, setting up a kitchen may require your oversight, and the associated costs can be passed on to the franchisee.

Transfer Fee

This fee applies when a franchisee decides to sell their business. You may charge for the due diligence and administrative work involved. Typically, this is a predetermined lump sum payment.

Given that this fee arises after the franchisee has commenced business and involves legal service costs, it’s crucial to consult a legal professional to ensure compliance with current legislation.

Renewal Fee

A renewal fee is charged for extending the franchising relationship with the current franchisee beyond the initial term specified in the agreement.

Considering that this event occurs after the franchisee has started their business, recent legislative changes may affect the ability to charge this fee. Professional legal advice is recommended for your specific situation.

Speaking To A Lawyer

The intricacies of franchising costs and fees can be complex, especially with recent legislative changes. To avoid unexpected costs, it’s best to draft legal documents correctly from the outset.

A specialist lawyer can help you navigate these complexities, ensuring that the fees you charge are lawful and appropriate for your franchising model.

Franchising Resources

Navigating New Zealand’s franchising laws requires expert legal assistance. We offer a range of resources to assist you at various stages of the franchising process, including:

Key Takeaway

There are numerous costs associated with running a franchising business. Not all costs need to be shouldered by you; some can be passed on to the franchisee as fees.

To ensure your franchising agreement is properly drafted and the fees you charge are within the legal framework, consulting a legal professional is advisable.

If you need assistance, contact our team for a free, no-obligations chat at [email protected] or 0800 002 184.

Naga Aditya Koneru

Aditya has experience in consulting, reinsurance, and government. He holds a double degree in Actuarial Studies and Laws from the University of New South Wales, and has a keen interest in public sector work.

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