The initial franchise fee: what to include and when to collect it

When turning an established business into a franchise, the initial fee is often one of the first elements of the offer. But the amount alone is not enough. Prospective franchisees need to know what they are paying for, when they will receive it and what happens if the partnership does not start as planned. For a healthy franchise network, a clearly explained initial fee is a foundation of trust, not simply a source of income for the franchisor.

First, define what the franchisee is actually buying

The initial fee may cover access to the business concept, the grant of a licence, the transfer of know-how or initial training and preparation. It does not necessarily cover every expense incurred before opening. The first step is therefore not to set a price, but to draw up a precise list of what will be provided.

For each item, note its scope, who is responsible, the deadline and how delivery will be documented. Instead of a general phrase such as “comprehensive help with starting your business”, specify, for example, the number of consultations, the extent of help with preparing an operating plan or the concrete outcomes of initial training. You do not have to sell each activity separately, but you must be able to explain the limits of the package.

Divide the offer into three groups:

• Included in the initial fee: clearly defined rights and one-off services provided by the franchisor.
• Charged separately: for example, equipment, opening stock or additional services requested by the franchisee.
• Paid directly to third parties: for example, rent, building work or administrative fees.

If you offer equipment as part of joining the network, set out its price and delivery terms separately in the contractual documentation. This helps the franchisee distinguish between paying for access to the concept and buying specific assets. It is equally important to distinguish the initial package from support funded by subsequent ongoing fees.

Base the price on both costs and the value of the concept

For your own calculations, list the work the franchisor carries out when bringing one franchisee on board. Include staff time, travel, external services and the resources needed to transfer the concept. Separate the one-off cost of developing the franchise system from the costs incurred each time a new franchisee joins. You do not need to recover the cost of creating the system from the very first franchisee alone.

The price need not simply reflect the total number of hours worked. It can also take account of the value of the brand and the know-how being transferred. For a new franchise, however, do not base that value on vague promises of future success. Explain it in terms of what you have already tested and proven, and what you can actually pass on to the franchisee.

Also check that you are not including the same cost in two different charges without a clear explanation. If initial training and preparation are included in the initial fee, work within the agreed scope should not appear again on a separate invoice. For work beyond that scope, require an order in advance and agree either a price or a method for calculating it.

State clearly in both the offer and the contract whether amounts include or exclude VAT, and which tax treatment applies. Have an accountant or tax adviser review the breakdown of what is being supplied; calling a payment an “initial fee” does not, in itself, determine its tax treatment.

Link payment deadlines to clear commitments

The contract can require the full amount to be paid on signing, but staged payments may make the arrangement clearer for both parties. Link each stage to a specific commitment or milestone: signing the agreement, providing access to agreed materials or completing initial training and preparation. This is not a model prescribed by law, but a practical way to manage expectations and cash flow.

For each payment, specify:

• the event that triggers the obligation to pay;
• the payment period and invoicing arrangements;
• what the franchisor must subsequently provide;
• the procedure if either party is late in meeting its obligations.

Watch out for circular conditions: the franchisee is required to pay only once preparation is complete, while the franchisor is required to begin preparation only after payment. A simple timeline of payments and deliverables will reveal contradictions of this kind.

Keep an appropriate record of materials handed over or services completed. This could be a handover record, confirmation of access or a summary of consultations held. However, confirmation of handover does not, in itself, mean that the franchisee waives any rights relating to defective performance.

Agree in advance what happens if the franchisee does not join

The Czech Republic has no specific franchise law and no compulsory registration of franchise agreements. A franchise agreement is usually entered into as an agreement not specifically defined by statute under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. The fee and related obligations are governed primarily by the general rules of contract law, including those on breach of contract and withdrawal from a contract.

There is therefore no special franchise rule making the initial fee always refundable or always non-refundable. The outcome depends on the terms agreed, what has actually been provided and the legal grounds on which the relationship ends. Simply labelling a fee “non-refundable” will not resolve every situation.

With a lawyer, distinguish between cases where the franchisee changes their mind without any breach by the franchisor, where the franchisor fails to provide what was agreed, and where an unmet condition prevents the franchisee from joining. For each scenario, specify how the parties will settle their accounts, how services already provided will be documented and the deadline for any refund. The agreed settlement arrangements must not circumvent mandatory legal rules.

Practical takeaway: Before making your first offer, prepare a one-page summary setting out what the initial fee includes, what it excludes, when it is payable and how it will be settled if the partnership does not go ahead. Only then incorporate those terms into the contract and sales materials.