Franchise fees: how to set charges before expanding

Setting fees for a future franchise takes more than looking at competitors. The charges must fund the support you promise while remaining affordable for the business an investor will run. In franchising, getting this balance right affects the quality of relationships and the network’s long-term viability. Before presenting your first offer, structure the franchisor’s income around costs, services and verifiable projections.

1. Separate set-up, support and advertising

Start by listing what the franchisor will provide before and after opening. This distinction helps avoid overlapping charges and unfunded commitments.

The initial franchise fee covers entry into the network and the initial package specified in the offer and agreement. To calculate it, establish the costs of selection, initial training, set-up guidance and support during opening. Include staff time, travel, materials and outsourced services, identifying who will pay each expense.

Royalties are the agreed recurring payments for the use of the franchise rights and system. Their calculation should reflect the resources needed to maintain the network: field consultancy, updates to operating methods, franchisee assistance and operational management, in line with the support promised.

The advertising contribution, where applicable, has a specific purpose. Do not treat it as money available to cover the franchisor’s general expenses. Set out which activities it can fund and how contributors will be able to monitor its use.

Create a spreadsheet with four columns: service or deliverable, frequency, estimated cost and funding source. If a promised service has neither someone responsible for it nor a budget, review the commitment before selling it.

2. Choose a verifiable charging basis

There is no universal royalty percentage suitable for every business. The charging model must reflect the economics of the operation and allow both parties to check the calculations.

Options include:

• Percentage of turnover: tracks the outlet’s revenue, but requires a precise definition of the calculation basis and reliable access to data.
• Fixed recurring fee: makes charges easier to forecast, but becomes proportionally more burdensome when sales fall.
• Income linked to product supply: requires transparency about compulsory purchases and the income built into the supply arrangement.

If you use turnover as the basis, clarify how cancellations, returns, discounts and sales through platforms will be treated. Do not let the sales team use vague expressions such as “a percentage of sales” when the agreement sets out something more specific.

Also specify payment deadlines, supporting calculation records, inflation adjustments and the consequences of late payment. Minimum charges and combined models need careful modelling: they may protect the franchisor’s revenue while putting pressure on the cash flow of an outlet that is still becoming established.

3. Test the numbers on both sides

Prepare two separate projections: one for the franchised outlet and another for the franchisor. A positive result at a company-owned outlet does not, on its own, show that both will be sustainable after expansion.

For the outlet, include purchases, staffing, rent, taxes, operating expenses, pay for the owner’s work and all network charges. Add local advertising, mandatory systems and working capital. Distinguish projected profit from available cash.

For the franchisor, estimate fixed costs and expenses that increase with each new outlet. Bear in mind that visits, training and assistance may require additional staff before recurring revenue is sufficient to cover them.

Model lower-than-expected sales, delayed openings and slower network growth. Ask: can the franchisor deliver the promised support without continually relying on new initial fees? If not, revisit costs, the pace of expansion or the proposed fee structure.

Record the assumptions used. Projections are decision-making tools, not guarantees of turnover, profit or payback periods.

4. Make advertising a transparent commitment

Before setting an advertising contribution, draw up a plan for its use. Distinguish shared campaigns and the production of materials from local activities that are the franchisee’s responsibility.

As good practice, establish a budget, approval responsibilities, reporting frequency and how remaining balances will be handled. Explain any administration expenses and how franchisees will participate in decisions, without promising powers that the agreement will not grant.

Transparency does not mean guaranteeing that each outlet will receive exactly the amount it contributed. It means making the shared objectives and the criteria for allocating funds clear.

5. Align the fees with Brazil’s Franchise Law

In Brazil, the applicable legislation is Law No. 13,966/2019, which repealed Law No. 8,955/1994. Article 2 requires the Franchise Disclosure Document, known locally as the Circular de Oferta de Franquia (COF), to state the estimated initial investment, the initial fee, recurring fees and other relevant charges, detailing how they are calculated and what they pay for or are intended to fund.

The COF must be provided at least ten days before the franchise agreement or preliminary agreement is signed, or any fee is paid to the franchisor or a person or company connected with it. Do not collect advance payments to “reserve” the opportunity without complying with this requirement.

Have the spreadsheets, commercial offer, COF and agreement reviewed jointly by legal and accounting professionals. In practice: only publish the fees once you can explain each charge, demonstrate its economic rationale and identify the corresponding service or deliverable.