Buying a franchise: understanding royalties and fees

Joining a franchise network means paying for access to a brand, know-how and shared services. But comparing two franchise brands solely on their royalty rates can lead to a poor decision. Before buying a franchise in France, you need to understand what you will be charged, how those charges are calculated and how they may change.

1. Identify all network charges

The operating royalty is not necessarily the only recurring payment. Depending on the contract, it may be supplemented by an advertising contribution, IT subscriptions, booking fees or separately billed services.

Ask the franchisor for a written list of mandatory fees, together with the applicable pricing schedules. For each item, identify who receives the payment: the franchisor, a related company, an IT provider or the organisation responsible for network-wide marketing.

Then divide the charges into three categories:

• One-off fees: the initial franchise fee, system set-up and initial training where charged separately.
• Recurring fees: operating royalties, advertising contributions, software and mandatory maintenance.
• Fees triggered by specific circumstances: training a new employee, additional support, switching systems or attending a compulsory event.

This distinction helps you avoid comparing a package that includes several services with an offer whose headline rate excludes numerous expenses. Also check mandatory purchases and supplier terms: these can affect your margin without appearing under “royalties and fees”.

2. Understand the calculation base before comparing rates

A percentage is meaningful only if its calculation base is defined. Does the contract refer to invoiced turnover excluding VAT, or to payments actually received excluding VAT? How does it treat refunds, credit notes, discounts and unpaid invoices? Are sales made through a platform or the network’s website included in the calculation base?

One point deserves particular attention: if you pay a platform commission, the royalty may still be calculated on the sale value before that commission is deducted. Do not confuse the amount received in your bank account with the calculation base specified in the contract.

Also look out for:

• a fixed fee, payable even if you make no sales;
• a guaranteed minimum payment, due whenever the percentage-based calculation produces a lower amount;
• tiered rates and their thresholds;
• index-linked increases or a price review clause;
• the date charging begins, particularly if this is before opening.

Ask for clarification on how thresholds work. A reduced rate may apply only to the portion above a threshold, or to total turnover. The outcome is not the same.

Finally, request a sample fee statement reflecting your business, with the different sales categories and any adjustments. This example should illustrate the contract, not replace a clearly worded clause.

3. Check what your contribution pays for

For each charge, compare the amount requested with its stated contractual purpose. Does an advertising contribution fund national campaigns only? Does it include producing materials you can use locally? Will you also have to commit to a minimum advertising budget for your own outlet?

The aim is not to assume that a high contribution is unjustified, but to avoid paying twice for something you thought was already covered.

Ask what reporting is provided on the use of the advertising budget. Do not assume you have a general right to audit: the arrangements for information, consultation or scrutiny need to be checked in the contractual documents.

For digital tools, check the number of users included, essential modules, update fees and the terms governing price increases. Ask several franchisees about the invoices they actually receive, distinguishing optional services from mandatory expenditure. Their contracts may differ from yours, however: these conversations help you identify questions to ask, rather than establish what you will pay.

4. Verify calculations and commitments before signing

In France, pre-contractual disclosure is governed in particular by Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law, and Article R. 330-1. Where the statutory conditions are met—notably where a trade mark or trading name is made available in return for an exclusive or near-exclusive commitment—the pre-contractual disclosure document and draft contract must be supplied at least twenty days before signing or, where applicable, before any advance payment.

This period gives you time to examine the financial commitments; it is not a guarantee of profitability. General contract law also applies. Have a lawyer familiar with franchising review price adjustment mechanisms and ambiguous clauses.

With your accountant, calculate the total annual fees under several trading scenarios. Separate out the impact of guaranteed minimum payments and fixed charges when sales fall. Then assess the charges against the margin available to cover them, not just turnover.

Key takeaway: before signing, obtain a complete schedule of fees, an unambiguous calculation base and written pricing commitments. The right measure is the true cost of the contract, not the headline rate.