Module 7 – What is a Management Service Fee or MSF?
In module 6 we looked at what support was on offer by the franchisor once you have started your franchise business. In this module we look at how you pay for this ongoing support and the licence to use the Know-how of the franchise, the MSF.
For the wealth of ongoing support offered to the franchisee by the franchisor you can expect in return to pay a Management Service Fee or Management Support Fee also called an ongoing Franchise Fee, Licence Fee, Royalty Fee. Dependent on your franchise this could take one of three common forms:
- Fixed Fee – Your monthly payments to the franchisor will not go up unless stated within your initial franchise agreement. Fixed Fees can be great as your business matures, as you will pay the same fixed monthly fee as your franchise business grows. Fixed fee franchises typically range between £200-£500+VAT per month.
- Percentage based fee – Percentage based fee models usually exist in larger franchise operations where you can expect significant growth during the period of your franchise agreement. Percentage based fees typically range between 5%-15% and are payable monthly in arears based on the turnover of your franchise. In percentage based models you can sometimes expect to make a minimum royalty payment after the FEE free period. If your turnover is quite low and it’s quite common place to see a minimum fixed management service fee or percentage, whichever is greater type licence fee.
- Product based fees – These are more common in the retail and or product based franchise market. This is where the franchisor will make a margin on the wholesale items of product that you are buying from them. This in turn represents the franchise fee.
Other considerations of the MSF:
- Fee Free – When you buy your franchise most but not all franchisors offer franchisees a fee free period so that you can focus on getting some customers in.
- Minimum royalty fees – Some franchisors, typically within the percentage based fee models may have a minimum royalty fee when your turnover is low. This will be explained within in your Franchise Agreement (to be discussed in a later module). Do ensure you plan for this where this is applicable.
- Failure to pay your MSF – If at any time you fail under your contractual obligations to pay your management service fees you may be in breach of your franchise agreement which could ultimately result in the termination of your franchise agreement. As such, it worth fully understanding your liabilities and financial commitments when looking to take on a franchise so that you can budget effectively.
Look forward to Module 8 – What does the franchisor get out of me buying their franchise?
- Hamilton Pratt Solicitors: http://www.hamiltonpratt.com/how-is-a-franchisors-management-service-fee-calculated-2/
- Which Franchise http://www.whichfranchise.com/feature_template.cfm?FeatureID=334
 Franchise Agreements will be discussed in a later module.