Under a ‘business system franchise agreement’ the owner of an established business format (the franchiser) grants to another person (the franchisee) the right to distribute products or perform services using that system. A wide variety of activities are the subject of franchise agreements.
The terms of agreements vary considerably but generally the franchisee gets the use of the system and any necessary management back-up for a specified period, of perhaps five to ten years, in return for:
- an initial fee (payable in one sum or in instalments), and
- continuing, usually annual, fees.
The continuing fees may be calculated as a percentage of turnover, a mark-up on purchases from the franchiser or a regular fixed payment per outlet. Continuing fees are intended to pay for services, which may be required in later years.
It is important to obtain a copy of the signed agreement if a question arises over the tax treatment of a franchise payment/receipt.