The initial franchise fee: agree what it covers and when refunds apply

When you turn your established business into a franchise network, the initial franchise fee needs more than a price tag. Franchisees must understand what they are buying, when their obligation to pay arises and how the fee will be handled if the planned outlet does not open. A clearly defined initial fee also helps the franchisor distinguish the costs of developing the concept from the work involved in getting an individual franchisee started.

1. Define what the initial franchise fee covers

The initial fee may cover, for example, the grant of the right to use the concept, start-up planning, initial training and services to prepare for opening. However, its scope is determined by what the parties agree, not by the name of the fee. Avoid simply calling it a ‘complete franchisee package’ if the limits of that package are unclear.

Start by preparing an internal breakdown of what the network does for each new franchisee. Then turn that breakdown into a description the franchisee can readily understand. For each item, specify the service or right to be provided, who is responsible and when it will be available to the franchisee.

In particular, distinguish between:

• one-off services and rights included in the initial fee
• services covered by the ongoing franchise fee
• products and services the franchisee must purchase independently
• additional work ordered and invoiced separately.

If training is included in the initial fee, specify who can attend and how much training is provided. Also explain whether travel, accommodation and staff training are included in the price. This avoids inadvertently promising the same service both as part of the initial fee and as a separately invoiced item later on.

2. Base the price on your own calculations

Do not simply copy another network’s initial fee. Concepts that look similar from the outside may require very different levels of induction and preparation. An estimate of the work involved, based on your own business experience, is therefore a better starting point than an assumed standard fee.

Calculate the working hours, external purchases and other direct costs involved in getting a new franchisee started. Keep these separate from earlier expenditure on developing the concept. The fee need not merely reimburse costs, but the pricing should reflect a deliberate decision about where the value lies and what the network must be able to deliver.

At the same time, assess whether the network has enough funding of its own to deliver the services if franchisees’ start dates are delayed. Cash flow that depends on initial fees can create pressure to rush agreements. Building a franchise network must not rely on using the next franchisee’s fee to pay for the previous franchisee’s start-up services.

Present all other mandatory start-up costs to the franchisee clearly and separately from the initial fee. State whether the quoted price includes VAT. Check the fee’s tax treatment and invoicing arrangements with your accountant, based on what it actually covers.

3. Link payment dates to identifiable events

The payment schedule should explain when the network can issue an invoice and which event triggers it. A phrase such as ‘at start-up’ is ambiguous: does it mean signing the agreement, starting training, granting the right to use the concept or opening the outlet?

One option is to split the fee into agreed stages. This is not a statutory requirement, but a choice when drafting the agreement. The stages could be linked, for example, to the agreement taking effect and the delivery of specified start-up services. Choose events whose completion can be demonstrated later.

If funding or premises have not yet been secured, address this before invoicing. The agreement must make clear whether the start of the franchise relationship is conditional and whether the network may begin chargeable preparatory work before the condition is met. A prospective franchisee’s initial interest alone does not constitute a clear order for paid services.

Keep systematic records of agreed approvals and deliveries. Training attendance records, a list of materials handed over and approval of preparatory work help establish what has actually been done. The purpose of documentation is to preserve both parties’ shared understanding, not merely to support invoicing.

4. Agree the consequences of cancellation for each scenario

An opening may fall through for many reasons. Funding may not be available, suitable premises may not be found, the franchisee may withdraw or the network may be unable to deliver the promised package. A single blanket statement that the fee is non-refundable does not reliably address all these situations.

When preparing the agreement, draw up a table of possible scenarios. For each one, record the reason for cancellation, what has already been delivered, the work not yet completed and a proposed approach to refunding or retaining the fee. Have a lawyer review the final terms.

For example, if the network has delivered the agreed training but has not carried out the remaining preparations, the assessment must distinguish services already delivered from those still to come. If, on the other hand, the network cannot grant the agreed right to use the concept, that is not the same as the franchisee voluntarily withdrawing. A refund arrangement set out in the agreement does not override any liability arising from a breach of contract.

Also define how a refund should be requested, how quickly the request will be dealt with and how the calculation will be explained. Distinguish a delayed opening from a definitive cancellation: a postponed start date does not necessarily mean the franchise relationship has ended.

5. Check the terms against Finnish contract law

Finland has no specific franchising legislation or statutory pre-contractual disclosure procedure specifically for franchises. The terms governing the initial fee are largely based on freedom of contract, but general legislation sets limits.

The Finnish Contracts Act governs the formation and validity of contracts. Section 36 allows an unreasonable contract term to be adjusted or set aside. The Unfair Business Practices Act also prohibits, among other things, false or misleading statements in business activities. Sales discussions must therefore not suggest that the fee covers more than it actually does.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not law. Check its relevance separately in light of your network’s membership and commitments. Nor should you assume that a business-to-business franchise agreement includes a general right to cancel comparable to that available in consumer transactions.

Practical summary: before recruiting franchisees, prepare one clear description of the initial fee: what it covers, its price, payment dates and the consequences of cancellation. Make sure your sales pitch, agreement and invoicing all tell the same story.