Franchise fees: how to set them when expanding your business

Running a successful company-owned outlet does not, on its own, tell you how much you can charge future franchisees. When expanding an existing business, you need to fund support for franchisees without draining their working capital reserves. Across a franchise network, fees should represent clear value in return for the brand, know-how and services actually provided. Start with your own costs and the franchisee’s financial model, rather than another network’s price list.

1. Work out the economics on both sides

Prepare two separate budgets: one for the franchise outlet and another for head office. The outlet’s budget should include rent, wages and employer contributions, stock, utilities, local marketing, insurance, equipment replacement and reasonable remuneration for a working owner. Only then should you assess how much is left for fees, loan repayments and profit.

For head office, distinguish the costs of recruiting a franchisee and opening a new outlet from the costs of ongoing support. Include the founder’s time too: visits to franchisees, handling complaints and delivering training are not free simply because you currently do them yourself.

Test at least three scenarios: expected performance, a slower build-up in turnover and persistently weaker sales. Monitor monthly cash flow, not just the annual accounting result. A franchisee can show a profit on the income statement yet still lack the cash to meet the next payroll.

Assess head office’s early-stage finances separately. A small number of franchisees will not usually cover all its planned costs. That shortfall must be covered by equity or other secured funding, not by assuming a continuous stream of new franchise licence sales.

2. Separate the initial franchise fee from the investment needed to open

Link the initial franchise fee to clearly defined deliverables. These might include initial training, the transfer of know-how, help with preparations for opening or the initial licence. For each item, specify its scope, who is responsible and when it will be delivered. A general promise of ‘comprehensive support’ provides no reliable basis for calculating costs or resolving a later disagreement.

Alongside this, prepare a breakdown of the expenses the franchisee pays separately:

• premises fit-out, equipment and signage;
• the landlord’s deposit and opening stock;
• any travel and accommodation costs for training;
• local launch marketing;
• working capital reserves for the start-up period.

The initial franchise fee is not the total initial investment. Keep the two figures clearly separate in both your offer and the agreement, and state whether they include VAT, where applicable.

Also agree payment deadlines and what happens to money paid if the outlet does not open. A franchisee abandoning preparations without good reason is a different situation from your failure to deliver the agreed services. The rules must reflect the agreement and the work actually carried out.

3. Set ongoing fees according to support needs and turnover

A percentage of turnover links head office’s income to the franchisee’s trading performance. A fixed monthly fee is easier to budget for, but places a greater relative burden on the franchisee when sales are weaker. Combining a percentage with a minimum payment can fund basic support, but requires careful testing against the weaker-sales scenario.

No option is automatically right. Base your decision on the business model’s margins, seasonality and support requirements. If, for example, turnover grows mainly through sales of low-margin products, an unchanged percentage fee may take an increasingly large share of the franchisee’s actual earnings.

In particular, the agreement should define:

• whether the fee is calculated on turnover excluding VAT;
• how returns, discounts and cancelled orders are treated;
• when vouchers and online orders are included;
• how sales are allocated between head office and outlets;
• how the franchisee submits supporting records and how checks are carried out.

For orders placed through third-party platforms, explicitly state whether the fee is based on the full selling price or the amount remaining after commission. The difference can significantly affect the economics of delivery services or online sales.

4. Make marketing contributions and other head office income transparent

Separate the marketing contribution from the fee for routine support. Specify what it funds, who approves the budget and how often franchisees receive a spending report. Also explain how shared campaigns relate to mandatory local marketing expenditure.

If contributions fund campaign management or work by your own team, disclose this in advance. Do not promise every outlet an equal value of advertising if you allocate funds according to the season, location or needs of the network as a whole.

The consolidated schedule of charges should also include mandatory software, additional training, licence renewal and any fees payable when an outlet changes hands. Compulsory purchases from head office also affect the franchisee’s finances. Assess the total financial burden, rather than focusing only on an eye-catchingly low basic fee.

5. Turn the calculations into enforceable terms

The Czech Republic has no dedicated franchise law or statutory schedule of franchise fees. A franchise agreement is generally concluded as an innominate contract — a contract not specifically defined as a named type in law — under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General rules on contractual obligations also apply, along with, for example, licensing provisions, depending on the nature of the arrangement.

Assess the tax treatment under the relevant tax legislation, particularly Act No. 235/2004 Coll., on Value Added Tax. The European Code of Ethics for Franchising is a self-regulatory document, not Czech law.

Work with a lawyer to set out payment deadlines, billing and reconciliation, procedures for disputing discrepancies, the consequences of late payment and any indexation. Any mechanism for changing prices must be clearly defined and legally permissible; simply allowing head office to rewrite the price list at any time is not a sound solution.

Practical takeaway: Before offering your first franchise licence, prepare a single schedule of all payments, test it against a weaker-performance scenario and link every fee to a specific deliverable or purpose. A sustainable franchise network needs both a financially healthy head office and financially healthy franchisees.