Franchising in Canada: structuring your fees and royalties

Turning an existing business into a franchise involves more than choosing an initial fee and a percentage of sales. Every charge must fund a specific function, be easy to understand and leave the franchisee with the resources to run their outlet. To build a sustainable franchise network in Canada, start with a coherent fee structure, then ensure it is accurately reflected in your legal documents.

1. Link each fee to a real function

First, distinguish the costs of bringing a franchisee on board from those involved in providing ongoing support. This separation avoids funding continuous support through initial fees that depend on new openings.

The initial franchise fee may help fund initial training, pre-opening support and access to shared tools. Specify what it covers: the number of people trained, the duration of support, and whether travel costs are included or charged separately. Do not let a broad phrase such as ‘start-up assistance’ take the place of a concrete description.

Ongoing royalties, by contrast, support continuing functions: operational support, franchise network engagement, development of the business concept and monitoring of standards. They may be a percentage of sales, a fixed amount or a combination of charging methods. No single model automatically suits every business.

Finally, list specific contributions and charges separately: advertising, software, additional training, renewal or transfer. For each, record:

• its purpose and who receives it;
• how it is calculated and how often it is charged;
• the services included and any exclusions;
• the circumstances in which it may change.

This record becomes a shared point of reference for accounting, the contract and discussions with prospective franchisees.

2. Define the calculation basis before choosing the rate

A royalty based on ‘turnover’ sounds simple, but that term alone does not resolve everyday situations. Two franchisees may report different amounts for identical transactions if the rules are unclear.

In particular, define how sales taxes, refunds, discounts, gift cards, online sales and orders placed through third-party platforms are treated. Does a delivery commission reduce the amount on which the royalty is calculated, or is it a franchisee expense that has no effect on the royalty? At what point is a gift card included in the calculation? Each answer must be consistent with the accounting systems used.

Also set out how sales are allocated when a customer orders through a shared website and then collects their purchase from an outlet. The aim is to avoid double counting and sales with no clear allocation.

Test the definition using sample transactions, then ask your accountant and legal adviser to check that it produces consistent results. Two people using the same definition should arrive at the same figure.

Finally, specify reporting frequency, payment deadlines, supporting records and verification procedures. If you are considering a minimum royalty, examine its impact during a temporary closure or a period of low sales.

3. Set clear rules for advertising, tools and indirect charges

An advertising contribution needs rules of its own, separate from general royalties. Describe the permitted expenditure: shared campaigns, content creation, digital marketing management or other planned activities. State whether administrative costs may be charged and what reporting franchisees will receive.

Do not promise that each outlet will receive local advertising expenditure exactly equal to its contribution. Instead, explain how decisions will be made and distinguish the shared fund from any mandatory local advertising budget.

For mandatory software and services, identify who issues the invoice, what is included and how price increases will be handled. A subscription presented as a minor expense can become a significant burden when several tools are added.

Also examine the franchisor’s indirect revenue: margins on supplies, commissions or supplier rebates. Seek advice on how these should be addressed in the contract and what information must be disclosed. Transparency about these arrangements helps prevent misunderstandings within the network.

4. Align the fee structure with legal obligations

In Canada, the applicable framework depends on the province; there is no general federal franchise disclosure law. In Ontario, for example, the Arthur Wishart Act (Franchise Disclosure), 2000, together with its regulation, governs pre-contractual disclosure and includes a duty of fair dealing.

Subject to the statutory exceptions, the disclosure document must be provided at least 14 days before whichever occurs first: signing an agreement relating to the franchise or paying any consideration. Fees and financial obligations must be presented in accordance with the applicable requirements. A commercial fee schedule alone is no substitute for this disclosure.

Quebec has no franchise-specific legislation. The Civil Code of Québec applies, among other things, to the formation and performance of the contract, including duties of good faith. The absence of a specific franchise regime therefore does not remove the need to provide prospective franchisees with adequate information.

Before making any firm offer, have the rules in the relevant province checked, along with consistency between sales materials, the contract and any required disclosure document. Also establish rules for future changes: notice periods, any indexation formula and limits on the power to amend charges.

Key takeaway: prepare a record for each fee, test the calculations and have the whole structure reviewed before requesting a signature or payment. Clear rules protect the relationship as much as the revenue.