Initial fees and royalties: how to set them when franchising in Argentina

Franchising your business means deciding not only what to charge, but also what you will provide in return. Copying another brand’s fee could leave you without the resources to support your franchisees or make their businesses unviable. A sustainable franchise fee structure must fund support while leaving each unit with enough margin to operate and reinvest.

1. Separate charges by purpose

Before setting amounts, draw up a list of what you will provide. Distinguish between the work involved in bringing a new unit on board and the services you will continue to deliver throughout the relationship.

The initial franchise fee may cover access to the system and start-up services: initial training, premises assessment, opening support and setting up tools. Specify what is included and which expenses fall outside the fee, such as travel, accommodation or additional training. Do not confuse it with the total investment needed to open.

Ongoing royalties fund continuing support and pay for the agreed rights and services. When budgeting for them, consider visits, handling enquiries, process updates, technology and business performance monitoring. If you promise intensive support, you need the actual capacity to deliver it.

The advertising contribution, if you introduce one, should be treated separately. Define what it will fund, who will manage the money and how its use will be reported. Avoid presenting it as a budget devoted exclusively to campaigns if it will also fund staff, content production or tools.

Also record any indirect income: margins on products supplied, supplier commissions or technology charges. The model’s sustainability must be assessed against the full financial burden, not just the advertised royalty rate.

2. Calculate your costs and check the unit’s margin

Prepare two linked budgets: one for the franchisor’s operation and another for a franchised unit. The first should show what it costs to deliver what you offer; the second, what the business can afford to pay without compromising its operations.

For the initial fee, estimate working hours, training costs, opening support and specialist input. Add a justified allocation of the costs of developing the system, without expecting to recover them in full through the first agreement. The price may also reflect the value of the system being transferred: it is not simply a sum of expenses.

For royalties, compare these options:

• Percentage of sales: moves in line with sales volume, but requires a verifiable basis for calculation.
• Fixed amount: makes income easier to forecast, but places a greater burden on the unit when sales fall.
• Hybrid structure or minimum payment: combines elements, but can significantly increase the burden on a unit with low turnover.

Test each option against scenarios involving lower sales, higher costs and delayed openings. Include rent, staffing, taxes, stock replenishment, the operator’s remuneration and working capital. Generating sales does not, in itself, mean a unit can afford the payments.

In Argentina, it is also worth modelling what happens when costs and revenue change at different rates. Any mechanism for adjusting charges should undergo legal review: do not assume that every adjustment formula is valid simply because it is written into the contract.

3. Turn the financial proposal into precise clauses

Franchising is governed by Articles 1512 to 1524 of Argentina’s Civil and Commercial Code, enacted by Law 26,994 and in force since 1 August 2015. Article 1512 provides for direct or indirect consideration from the franchisee; Article 1515 includes payment of the agreed consideration and advertising contributions.

These provisions do not set an official fee scale or require an initial fee, royalties and an advertising fund to be used together. The structure must be agreed in compliance with the applicable legal framework. A bill is not the same as a law in force: do not treat proposed registration requirements or time limits as current obligations.

Have the contract and its financial schedules specify:

• The purpose, amount or formula for each charge.
• Currency, payment due dates, invoicing and tax treatment.
• The sales base: whether VAT, discounts, returns and transactions through platforms are included or excluded.
• The procedure for reporting, verification and correcting discrepancies.
• Additional expenses, conditions for changes and the consequences of late payment.

If you accept a reservation payment before signing, document its purpose, how it will be credited towards the price and the conditions for a refund. Do not assume it is always refundable—or that it never is.

4. Check for consistency before offering the franchise

Check every sales promise against its budget and contractual clause. If you offer regular visits, identify who will make them and how they will be funded. If you charge for advertising, put a clear reporting mechanism in place.

Also check that the structure can sustain itself with only a few units: relying on new initial fees to meet ongoing obligations is a sign of fragility. Review the figures with an accounting professional and the terms with a lawyer experienced in franchising.

Practical takeaway: before publishing a price, complete a table showing each charge, the associated service or benefit, its cost and the contractual rule governing it. If you cannot explain any item clearly, it still needs work.