Franchise fees: how to set them for a business in Croatia

When preparing to expand an existing business through franchising, do not set your fees by copying a competitor’s price list. Fees must fund your contractual obligations while leaving the franchisee enough room to run a viable business. A well-designed fee structure links what franchisees pay to what they actually receive, creating a sound foundation for a long-term franchise network.

1. Separate joining the network from ongoing use of the franchise

Initial and ongoing fees serve different purposes. The initial fee may cover access to the business concept and certain activities involved in bringing a franchisee on board. The ongoing fee may cover continued use of the agreed rights, development of the system and ongoing support. Exactly what is included depends on your offering and contract, not simply on the name of the fee.

For the initial fee, draw up a list of specific deliverables: initial training, preparations for opening, access to documentation, system setup and your team’s time. For each item, specify the quantity, the person responsible and the actual cost. Clearly identify any travel, accommodation and external services that the franchisee may have to pay for separately.

The initial franchise fee is not the same as the total initial investment. Equipment, fit-out, stock, the rental deposit and working capital must be shown separately. Otherwise, candidates may wrongly assume that paying the fee covers everything they need to open.

Do not try to charge the first franchisee for the entire cost of developing your future franchise network. Separate investment in your own system from the cost of bringing an individual franchisee on board.

2. Choose an ongoing fee model based on the economics of the outlet

Ongoing fees can be fixed, turnover-based or a combination of the two. No model is automatically the best choice.

• A fixed fee makes planning easier for the franchisor, but places the same burden on the franchisee even in a quieter month.
• A percentage fee varies with turnover as defined in the contract, but higher sales do not necessarily mean higher profits for the outlet.
• A combined fee may include fixed and variable elements, but requires particularly clear calculations to avoid creating an unpredictable financial burden.

If you are considering a minimum monthly fee, check its impact during the start-up period and seasonal downturns in sales. Where margins vary between products or services, a single percentage can place a heavier burden on outlets whose sales depend on less profitable items.

For each model, calculate two figures: how much the franchisee retains after all fees, and how much the franchisor retains after covering the cost of the promised services. A fee that works for only one party is not a sound basis for a long-term relationship.

3. Test your fees under a weaker trading scenario

Use data from your existing business to prepare a separate financial model for a future franchised outlet. Include all recurring costs and a market-rate allowance for managing the business, even if the franchisee will run it personally. Then add every mandatory fee, not just the main franchise fee.

Test at least a base-case and a downside scenario. In the downside scenario, assume slower sales growth, higher costs or a longer start-up period. Clearly label these assumptions as estimates, not promises of results.

Check payment timings too. An outlet may show an accounting profit yet still struggle to pay its fees if customer payments arrive later. The frequency of fee calculations and payment deadlines should therefore reflect how the particular business collects payments.

On your side, calculate whether you can still provide the agreed support if franchisees’ turnover is lower than expected. If the system depends on a constant flow of new initial fees, reassess its viability before expanding.

4. Turn your fee schedule into clear contractual terms

Croatia has no dedicated law comprehensively governing franchising, nor a statutory scale of franchise fees. A franchise agreement is an innominate contract, meaning it is not a specifically defined contract type under Croatian law, and contractual obligations are governed by the Civil Obligations Act. The Competition Act and applicable European Union rules are also relevant, particularly where restrictions affect franchisees’ business activities. The tax treatment should be checked against the specific supplies involved and the status of the contracting parties, including the application of the Value Added Tax Act.

For each fee, the contract should clearly specify:

• what the payment is for and what is included;
• the amount or calculation method, including VAT treatment;
• when the obligation arises and when payment is due;
• the conditions for any changes to the amount;
• the consequences of late payment and the conditions for any refund.

For a percentage fee, define the calculation base unambiguously, including how returns, discounts and cancelled invoices are treated. For the initial fee, set out what happens if the outlet does not open and how services already delivered will be accounted for. Calling a fee ‘non-refundable’ does not, by itself, resolve all the legal consequences of a failure to fulfil the contract.

Practical takeaway: before offering your first franchise, prepare a consolidated schedule of all fees, a financial viability assessment for both parties and contractual terms reviewed by a lawyer and an accountant. Franchisees must be able to understand not only how much they are paying, but why.