Initial franchise fee: how to set it before expanding

When turning an existing business into a franchise, the business owner needs to decide how much to charge each new franchisee to join. Copying another brand’s fee or choosing an amount solely to meet cash flow needs can undermine expansion. In franchising, a well-structured initial fee combines sound economics, clearly defined deliverables and transparency for prospective investors.

1. Define what the initial fee covers

The initial franchise fee should not be confused with the total investment needed to open an outlet. It is one component of that investment, and its purpose must be clear to the prospective franchisee.

Before calculating an amount, describe the rights and activities covered by the fee. Depending on the model adopted, these might include joining the network, initial access to operational know-how and certain services to prepare the outlet for opening. These elements are not automatically included: they must reflect what the franchisor will actually provide.

Create a simple table with three columns:

• Included in the fee: deliverables for which no separate additional charge will apply.
• Charged separately: expenses payable on top of the fee, identifying who is responsible for payment and the applicable terms.
• Not provided: activities the franchisee will need to arrange or carry out themselves.

For example, if opening support is included but the team’s travel and accommodation costs are charged separately, make that distinction clear. Avoid expressions such as “complete set-up” where significant exclusions apply.

Also distinguish the initial fee from recurring charges. Ongoing support requires ongoing funding; it should not depend indefinitely on new franchisees joining the network.

2. Calculate the cost of supporting a new outlet

Start by estimating the resources the franchisor will need to bring each new franchisee on board and prepare them to operate. Even when the founder handles these tasks personally, their time has a cost and should not be left out of the calculation.

List the activities included and estimate the hours required, staffing costs, materials and any third-party services for each one. Also factor in applicable taxes and relevant sales costs, with accounting support to avoid inappropriate classifications or calculations.

Separate expenditure into two groups:

• Costs per new franchise: costs that increase with each new franchise agreement, such as time spent providing individual guidance and materials supplied to the outlet.
• Investment in developing the network: expenditure that benefits several outlets, such as the initial development of the set-up process.

A share of the investment in network development can inform your pricing. However, trying to recover the entire cost of developing the franchise model through the first few sales may make the offer uncompetitive. At the other extreme, ignoring these costs may create an expansion programme that appears profitable but cannot sustain the franchisor.

Use conservative scenarios. Assess the cost of supporting an outlet that needs more guidance, and what happens when two openings require attention at the same time. Your ability to deliver must match your commercial offer.

3. Assess the fee within the prospective franchisee’s overall investment

Once you have estimated costs and your intended margin, assess the fee from the franchisee’s perspective. They will also need to fund premises and fit-out, equipment, stock and the other resources required to open and run the business.

A fee that seems modest in isolation may put pressure on cash flow when added to other expenses. Examine its effect on the total investment and the financial viability of the operation, without presenting projections as a guarantee of returns.

Comparisons with other networks provide a reference point, not a formula. Two brands may charge similar amounts while offering very different rights, preparation and support.

If you offer special terms to the first franchisees, document the eligibility criteria, the offer period and the deliverables that remain included. A discount should not conceal the removal of essential services. Nor should it be offset by later charges that the prospective franchisee was unaware of.

4. Align payment terms, the COF and the agreement

In Brazil, Law No. 13,966/2019 governs business franchising and repealed Law No. 8,955/1994. Article 2 requires the franchise disclosure document, known as the Circular de Oferta de Franquia (COF), to state the initial joining or franchise fee, as well as the estimated total initial investment.

The law also requires the COF to be provided at least ten days before the franchise agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. Do not collect payment early under labels such as a “place reservation fee”.

With legal advice, ensure that the COF, agreement and commercial proposal are consistent on the amount, payment deadlines, instalments, inclusions and additional expenses. Also define how withdrawals, obstacles to opening and services already performed will be handled. Do not assume that retaining a payment will be legally valid simply because the agreement allows it.

Practical summary: before advertising the initial fee, prepare a table of deliverables, a documented calculation and consistent payment terms across your documents. The fee must fund a promise the franchisor can fulfil.