From a franchisee’s perspective, one of the most detrimental aspects of investing in a franchise is the obligation to pay a minimum monthly fee (MMF). Not all franchises use this system, but most do. And in those cases, it is non-negotiable.
We strongly believe that MMFs should be banned outright. The British Franchise Association (BFA) should go further than its current Code of Ethics, which merely states, “The BFA will support fixed monthly fees only when they are fair, reasonable, and commercially justified.” Unfortunately, the BFA provides no clear guidance on what constitutes “fair and reasonable” or how these fees can be justified.
Seeking clarity on this issue, ChatGPT suggested, “For franchisors, minimum monthly payments provide a steady revenue stream, ensuring they can maintain the level of support promised to franchisees.” With all due respect to artificial intelligence, if a franchisor can’t maintain adequate support without imposing MMFs, it shouldn’t be recruiting franchisees in the first place.
How Minimum Monthly Fees Work
To illustrate how MMFs can harm franchisees, consider this scenario: a franchise agreement stipulates a management fee of either 10% of sales or £250 per month, whichever is greater. If monthly sales are £2,500 or more, the franchisee pays the expected 10%. However, if sales drop to £1,000, the franchisee ends up paying 25%—far above the budgeted 10%. This is a common scenario that often puts franchisees in a difficult financial position
The Flawed Justification for MMFs
In most cases, MMFs are unjustifiable. Franchisors often impose them because they can’t generate enough income from a percentage-based fee alone due to poor franchisee sales performance. Many franchises in the UK look promising on the surface but fail to deliver sufficient sales for their franchisees. With a guaranteed monthly income from MMFs, franchisors lack the incentive to help franchisees succeed.
This leads to a troubling dynamic where franchisors prioritise signing up new franchisees over supporting existing ones. The focus shifts from growing the business to simply recruiting more franchisees. There’s little concern about the suitability of potential franchisees or the business potential in their territories. Why should they worry when they can collect a lucrative joining fee and a guaranteed MMF every month for the duration of the franchise agreement?
The Consequences for Franchisees
Unsurprisingly, this model leads to a high franchisee failure rate. For the franchisor, this isn’t a problem—they can simply resell the territory to a new franchisee. But for the failed franchisee, it’s devastating. They watch their investment evaporate as they bleed money and run out of cash. The franchisor offers little to no assistance, often suggesting only that they “try harder” or find someone else to buy their failing business. If the franchisee wants out, they must pay the franchisor a release fee. And guess what, that will be calculated based on all the MMFs owed for the remainder of the agreement.
The franchisor threatens legal action but offers to reduce the exit fee on condition that the franchisee signs a nondisclosure agreement. The cycle repeats, with new victims each time.
Conclusion
Minimum monthly fees should be outlawed. They benefit franchisors at the expense of franchisees, leading to a system where failure is profitable for the franchisor and catastrophic for the franchisee. The BFA should take stronger action to protect franchisees from this exploitative practice. Unfortunately, as membership is voluntary, many of the worst franchises are not part of the BFA, but it would be a start. Ideally this requires government regulation.
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