Buying into a franchise can feel like getting a business “shortcut” - you’re stepping into a proven model, an established brand, and (usually) a set of systems you don’t have to build from scratch.
But franchising isn’t just “buy the business and start trading”. One of the biggest practical (and legal) questions franchisees ask is: what do I actually have to pay the franchisor, and when?
This matters because franchise payments aren’t just a single upfront fee. In most franchise systems, your financial obligations continue throughout the term, and the way those fees are structured can significantly affect cashflow and profitability. This update reflects current, common fee structures and the modern focus on disclosure, advertising transparency, and brand protection.
Below, we’ll walk through the typical categories of payments, what they’re usually for, how they’re commonly calculated, and the contract terms you’ll want to read closely before you sign.
What Payments Do Franchisees Usually Make?
Most franchisees pay the franchisor through a mix of upfront fees, ongoing fees, and pass-through costs.
The exact structure depends on the industry (food, retail, services, online, etc), the maturity of the franchise system, and how much support the franchisor actually provides.
Here are the main payment types you’ll commonly see in New Zealand franchise agreements:
- Initial franchise fee (often paid upfront on signing)
- Ongoing royalty (weekly/monthly; usually a percentage of sales or a fixed amount)
- Marketing / advertising fund contribution (regular payment into a shared marketing pot)
- Training fees (sometimes included, sometimes charged separately)
- Technology and software fees (POS systems, ordering platforms, apps, CRM tools)
- Product and supply fees (including mandated suppliers or purchasing through the franchisor)
- Renewal / extension fees (if you want a further term)
- Transfer fees (if you sell your franchise)
- Audit, compliance, and inspection costs (in some systems)
- Other “special” fees (site approval, additional territories, extra support)
Not every franchise includes every fee, but most include the first three.
What Is The Initial Franchise Fee, And What Does It Cover?
The initial franchise fee (sometimes called an “upfront fee” or “grant fee”) is the amount you pay for the right to operate the franchise under the franchisor’s brand and system for the agreed term.
In plain terms: it’s often the price of entry.
What It Usually Pays For
Depending on the franchise, this fee may cover (or partially cover):
- the right to use the franchisor’s brand and intellectual property (trade marks, logos, brand assets)
- initial training (you and possibly key staff)
- access to operating manuals and systems
- site selection support or business planning support
- opening support (launch marketing, first-week operational assistance)
Sometimes the fee looks high because it includes substantial launch support. Other times, it’s more of a “licence fee” and the real costs show up later (royalties, marketing contributions, software, supplies).
Is The Initial Franchise Fee Refundable?
Usually, no - and this is a key thing to confirm before signing. It’s common for franchise agreements to say the initial fee is non-refundable, even if you change your mind later, or even if the business doesn’t perform the way you hoped.
This is why it’s so important to review the agreement carefully and make sure any conditions you’re relying on are properly documented. If the deal is subject to you getting finance, a lease, or council approvals, you want the timing and conditions clear before you’re locked in.
It can also help to understand whether you’re signing something intended to be binding immediately, or something that’s conditional - that’s where understanding Unconditional Contract terms can make a real difference in practice.
How Do Royalties Work (And What Should You Watch For)?
Royalties are the main ongoing payment most franchisees make to the franchisor. Think of royalties as the ongoing fee for continued use of the franchise system and ongoing support.
Royalties can be structured in a few common ways:
1) Percentage Of Gross Sales (Most Common)
This is one of the most common models. You pay a percentage of your gross revenue (not profit) each week or month.
This detail matters. Paying royalties on gross sales means:
- you pay royalties even if your costs increase
- you pay royalties even in a “slow month” where you barely break even
- you’ll want to be very confident the model leaves enough margin after rent, wages, and supplies
As a franchisee, one of your key due diligence questions is: what is the average margin in this system after royalties and marketing contributions?
2) Fixed Royalty Fee
Some franchises charge a fixed amount (e.g. $X per week/month). This can be easier to budget, but it can also feel heavier in the early days if revenue is still ramping up.
3) Tiered Or Hybrid Royalties
Some franchisors use a structure like:
- a lower percentage up to a revenue threshold, and a higher percentage above it
- a fixed “minimum” royalty plus a percentage component
This isn’t automatically good or bad - but you should understand exactly when the higher tier kicks in, and how it’s calculated.
Common Royalty Clauses To Read Closely
When you’re reviewing a franchise agreement, the “royalty” clause is rarely just a single line. You should also check:
- Payment timing: weekly vs monthly; direct debit; interest on late payments
- Reporting obligations: what sales data you must provide and how
- Audit rights: whether the franchisor can inspect records and charge audit costs if discrepancies are found
- What happens on dispute: whether you must keep paying during a dispute (some agreements require this)
If you’re negotiating or renewing a franchise agreement, it’s also common to see these obligations tied into broader contract structures. If you’re dealing with a complex suite of documents, a proper Contract Review can help you understand what you’re actually signing up to.
What Is The Marketing Fund, And Why Do Franchisees Pay It?
Many franchises require you to contribute to a marketing fund (also called an advertising levy, advertising fund, brand fund, or promotional contribution).
This is usually a regular payment - often separate from royalties - intended to fund brand-level marketing such as:
- national digital campaigns
- brand awareness advertising
- website maintenance and SEO
- social media content
- creative production (photo/video)
- promotional materials
Two Common Marketing Payment Structures
- Percentage of sales: often a smaller percentage than royalties
- Fixed contribution: set amount per week/month
Marketing Fund Transparency: What To Ask
Marketing funds are a common source of franchise tension - not because franchisees don’t want to pay marketing, but because they want to know the spend is fair and actually benefits the network.
Before you sign, it’s worth checking whether the agreement covers:
- how the fund is held and administered
- who decides how it’s spent
- whether financial statements or reporting are provided to franchisees
- whether the franchisor can use the fund to pay its internal staff or overheads
- whether local marketing is mandatory on top of the fund contribution
Marketing also intersects with legal compliance. If you’re required to run specific promotions or advertise in a certain way, you still need to ensure your advertising isn’t misleading - New Zealand’s Fair Trading Act 1986 applies, including for franchise advertising and pricing claims.
What Other Ongoing Costs Might A Franchisor Require You To Pay?
Beyond royalties and marketing contributions, franchisees often pay additional costs that can be “mandatory” even if they don’t look like a classic franchise fee.
These costs are important because they affect your true cost base - and they’re often buried across multiple clauses (operations manual, IT schedule, supplier schedule, training schedule).
Technology, Software, And System Fees
Many franchisors require you to use specific systems such as:
- POS software
- online ordering
- booking systems
- inventory management
- customer databases / loyalty programs
You might pay for these through the franchisor (as a pass-through cost), or directly to a third-party provider. Either way, it’s worth checking:
- setup fees vs ongoing subscription fees
- who owns the data
- what happens if the franchisor changes platforms
- whether you’re locked into a minimum term
Because these systems often involve customer data, privacy obligations can come into play too. If you’re collecting customer information (even just names and email addresses), having a fit-for-purpose Privacy Policy is a practical step toward complying with the Privacy Act 2020.
Training Fees And Re-Training Costs
Initial training might be included in your upfront franchise fee, but many systems charge for:
- training additional staff
- refresher training
- training when systems or menus change
- training required after a compliance breach
It’s not unusual for a franchise agreement to say training is mandatory, and that the franchisee pays the associated costs (including travel, accommodation, or trainer fees).
Supply, Product, And Purchasing Requirements
Many franchises require you to buy products from:
- the franchisor directly
- approved suppliers
- a nominated distribution system
This can make sense - it protects brand consistency and quality control. But from a franchisee perspective, you should understand:
- are prices competitive?
- is there a rebate paid back to the franchisor (and is that disclosed)?
- what happens if there are supply chain disruptions?
- can you propose alternative suppliers?
Sometimes these purchasing rules also raise competition and consumer issues, especially if customers are being sold a “standardised” product experience. Your day-to-day customer dealings still need to comply with the Consumer Guarantees Act 1993 and the Fair Trading Act 1986, even if the franchisor gives you the marketing scripts or terms.
Operational Support And “Special Assistance” Fees
Some agreements include the concept of “special assistance” where the franchisor can charge extra if you need additional support beyond what’s considered standard.
For example:
- the franchisor steps in to help after poor performance
- you request extra onsite help during peak season
- the franchisor has to fix compliance issues after an audit
This isn’t automatically unreasonable, but you’ll want to know when these fees apply and how they’re calculated (fixed rate, hourly rate, plus expenses, etc).
What One-Off Fees Might Apply If You Renew, Exit, Or Sell?
A franchise is often a long-term commitment, but it’s still a business asset - and most franchisees will eventually want to renew, sell, or exit.
Your agreement will usually include specific payments for those events.
Renewal Or Extension Fees
If you want another term after your initial term ends, you may need to pay a renewal fee. This can be:
- a fixed amount
- a percentage of the then-current franchise fee
- an amount linked to training or “re-grant” costs
Also check if renewal is automatic or conditional. Some franchisors require you to:
- be up to date on all payments
- complete refurbishment or upgrades (common in retail and hospitality)
- sign the “then-current” franchise agreement (which may have different terms)
Transfer Fees (Selling Your Franchise)
If you sell your franchise business, the franchisor usually has a say in the process. Transfer fees may cover:
- reviewing and approving the incoming buyer
- training the incoming buyer
- admin and documentation costs
You’ll also want to understand the franchisor’s rights around approval and timing - because if you’re relying on a sale to exit, delays can be costly.
If your exit is part of a bigger transaction (for example, selling the business assets), you’ll often need sale documentation as well. A properly drafted Business Sale Agreement helps reduce the risk of disputes about what’s included in the sale and what happens at settlement.
Exit Costs And De-Branding Obligations
Even if you’re not paying a specific “exit fee”, you might still face significant practical costs when the agreement ends. Many franchise agreements require you to:
- stop using all brand elements immediately
- return manuals and confidential materials
- transfer phone numbers, websites, or social media pages (sometimes)
- remove signage, uniforms, branded vehicles, and fit-out elements
This can add up, so it’s worth planning for it early - especially if your lease or fit-out is expensive.
What Legal Issues Should You Check Before Agreeing To These Payments?
The “what do I pay?” question is really two questions:
- What do I pay? (the amounts and formulas)
- What do I get in return? (support, systems, brand value, training, marketing outcomes)
To answer both properly, you need to read the franchise agreement carefully, and you should also check any disclosure and supporting documents the franchisor provides.
Make Sure The Fees Match The Reality Of The Support
A franchise agreement often lists franchisor services in broad terms like “ongoing support” or “marketing assistance”. Before you commit, try to get clarity on what that support actually looks like in practice, for example:
- Is support onsite or remote?
- How many training days are included?
- How quickly does head office respond to requests?
- Is marketing spend targeted to your region, or mostly national brand awareness?
Understand Your Employment Cost Base
Many franchisees underestimate wages and people management costs - and royalties don’t pause just because you’re short staffed.
If the franchisor provides template employment documents, that can be helpful, but you’re still responsible for employing people correctly and meeting your obligations under New Zealand employment law. Having the right Employment Contract terms in place from day one can help protect you if a staff issue comes up later.
Check If Any Fees Can Change During The Term
Some agreements allow the franchisor to increase:
- royalty rates
- marketing contributions
- technology fees
- training costs
This doesn’t always happen, but if the agreement allows it, you should understand:
- how much notice must be given
- whether increases are capped
- whether franchisees get any consultation rights
Be Careful With “Pay No Matter What” Clauses
Some franchise agreements are drafted so that you must continue paying royalties and other fees even if:
- you are disputing the franchisor’s performance
- the franchisor is allegedly in breach
- the business is temporarily closed (for example, due to repairs)
These clauses aren’t always enforceable in every context, but they can still create a lot of practical pressure. It’s worth getting advice before you sign, particularly if the fee obligations are aggressive.
Know What Happens If You Want To Walk Away
Franchise agreements often include:
- minimum terms
- termination rights (usually stronger for the franchisor than the franchisee)
- restraint-of-trade style restrictions (limits on competing businesses)
This is where “getting it right from the start” really matters - because once you’ve signed, your exit options may be limited and expensive.
If you’re unsure about the risk profile of a franchise agreement, it’s usually better to get it checked before you commit. A targeted Franchise Agreement Review can help you understand the real commercial impact of the fee clauses and whether they’re workable for your situation.
Key Takeaways
- Most franchisees pay a mix of upfront and ongoing fees, usually including an initial franchise fee, ongoing royalties, and marketing fund contributions.
- Royalties are commonly calculated as a percentage of gross sales (not profit), so you’ll want to model your margins carefully and understand the cashflow impact.
- Marketing fund contributions are common, but it’s important to check how the fund is administered, what it can be spent on, and what reporting you’ll receive.
- Additional ongoing costs can include technology/software fees, mandatory training costs, and purchasing requirements through approved suppliers.
- One-off fees can apply when you renew, transfer (sell) your franchise, or exit - and de-branding obligations can create significant practical costs.
- The franchise agreement usually controls when fees are payable, whether they can increase, and what happens if there’s a dispute, so it’s worth getting legal advice before signing.
If you’d like help reviewing a franchise agreement or understanding what you’ll really be paying (and what you should be getting in return), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
