Franchise fees: pricing your network’s support sustainably

When you expand a successful business into a franchise network, planning your fees is about more than the network’s revenue stream. Fees must fund the support promised to franchisees without undermining the profitability of their local businesses. A sound fee model starts with the costs of your own concept, a clear account of what each fee covers and an assessment of both parties’ finances — not by copying another network’s percentages.

1. Start by calculating the cost of supporting a franchisee

The profitability of your own outlet does not yet tell you what you need to charge to support independent franchisees. In your existing business, the founder’s advice, problem-solving and staff induction may be invisible in the accounts. In a franchise network, these tasks need allocated staff time and clearly assigned responsibilities.

Divide the costs into three groups:

• Start-up costs: franchisee induction, preparations for opening, system implementation and practical launch support.
• Ongoing support costs: advice, training, quality monitoring, shared systems and maintaining the concept.
• Shared development costs: updating services, joint marketing and projects that benefit the whole network.

Estimate both externally purchased services and your own staff’s time. Also distinguish fixed costs from those that rise with each new franchisee. Your current support team may be able to take on one more franchisee, but the next addition could require a new recruit.

Prepare separate calculations for your first franchisee and for a later, more established network. If your pricing only works with a large number of franchisees, you will need a funding plan for the initial phase. Future initial franchise fees should not be used to prop up ongoing support that consistently operates at a loss.

2. Make clear what each fee covers

It is worth distinguishing the purpose of the initial franchise fee from that of the ongoing franchise fee. The initial fee might cover an agreed package of introductory training and set-up support, for example. State precisely what is included and which opening costs the franchisee must pay separately.

The ongoing fee can be fixed, linked to turnover or a combination of the two. A fixed fee makes the network’s revenue stream predictable, but places a proportionately heavier burden on a small or newly opened unit. A turnover-based fee varies with sales, but does not directly take account of the franchisee’s margin. The right structure depends on the costs of the concept and how support needs change as the business grows.

If you charge a separate marketing levy, define how it will be used and reported on. Also explain whether franchisees are expected to carry out local marketing in addition to paying the levy. A shared levy does not in itself guarantee a particular number of customers or level of sales.

Bring all costs associated with the franchise relationship together in a single fee schedule. Include system fees, additional training, any renewal fees and mandatory purchases. If the network also earns revenue from selling products to franchisees, take this into account when assessing its overall earnings. The ongoing fee percentage alone does not reflect the franchisee’s true cost.

3. Test the fee model against the franchisee’s profit and cash flow

Prepare profit and loss and cash flow forecasts for a franchise unit before finalising the fees. Use actual figures from your own business, but adjust them to reflect an independent franchisee’s circumstances. For example, unusually cheap premises or unpaid work by the founder are not safe assumptions for a new unit.

Include stock purchases, staffing, premises, insurance, systems, local marketing and all franchise fees. Allow realistic remuneration for the franchisee’s own work. In the cash flow forecast, also account for capital expenditure, working capital, taxes, loan interest and repayments.

Test at least the following scenarios:

• Sales build up more slowly than planned.
• Staffing or purchasing costs rise.
• Seasonal fluctuations lead to quiet months.
• Opening is delayed even though costs are already being incurred.

Review the network’s cash flow at the same time. If you offer a fee reduction during the start-up period, establish how you will fund the more intensive support needed at that stage. Clearly document how long the reduction lasts and when it ends, so that neither party misunderstands the temporary arrangement.

The aim is not to find the highest fee a franchisee can just about afford. It is to set prices that enable both the local business to operate and the franchise network to develop over the long term.

4. Turn your pricing into unambiguous contract terms

Finland has no dedicated franchise law, statutory register specifically for franchise networks or specific legislation governing franchise disclosure documents. However, fee terms and the way they are presented are subject to general legislation, including the Finnish Contracts Act, the Act on the Regulation of Contract Terms between Businesses and the Unfair Business Practices Act. Unreasonable terms may be adjusted, and marketing must not give a misleading impression of costs.

The Finnish Competition Act and EU competition rules must also be considered, for example where the fee model involves purchasing obligations or resale pricing. The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation. It binds the association’s members, and parties may also commit to it in their contract.

The agreement should specify, at a minimum, the basis for calculating each fee, the billing period, the payment due date, VAT treatment and audit rights. For turnover-based fees, clarify how credits, returns, gift cards and online sales are treated. Do not leave franchisees guessing whose sales figures an order placed through the shared online shop will count towards.

Also agree on fee reviews, any index-linked adjustments and how changes will be communicated. Have the terms reviewed by a lawyer familiar with franchise agreements and the tax treatment checked by an accountant.

5. Monitor the balance between fees and promised services

Regularly compare fee income with the actual cost of support. Monitor the profitability of franchise units too: growing revenue for the network does not, on its own, demonstrate that the model works. Discuss with franchisees which services they use and where they need more support.

If the cost structure changes, do not automatically introduce new fees. First explore opportunities to improve the division of responsibilities, systems and service efficiency, as well as the limits on changes under existing agreements.

Practical checklist: prepare a fee schedule, calculate profitability for both parties and document what each fee covers. Only finalise your pricing once you can demonstrate how it will fund the support promised to franchisees.