Franchising your business: setting sustainable fees

Turning an existing business into a franchise network requires a new financial balance: your own outlet may be profitable, but supporting franchisees may not be. Before setting an initial franchise fee or royalty percentage, work out the cost of what you will actually provide and what each partner can afford. Here is a method for building a transparent, sustainable fee structure.

1. Separate start-up costs from ongoing support costs

Do not start by copying an established brand’s fees. Its organisation, purchasing arrangements and services may be very different from yours. Instead, start with two separate budgets.

The first covers bringing a new franchisee into the network: initial training, preparations for opening, travel, on-site assistance and setting up systems. For each task, estimate the time involved and its full cost, including the business owner’s time. Work you do yourself is not free.

The second covers ongoing support: network coordination, operational assistance, continuing training, system maintenance and improvements to know-how. Distinguish fixed expenditure from costs that rise with each new opening.

The initial investment in setting up the franchise operation also needs funding. However, making the first franchisees bear the full cost risks making their launch too expensive. Build a funding plan for the franchisor’s business rather than relying solely on future initial franchise fees.

Useful output: a table linking each service to its cost, frequency, person responsible and funding source.

2. Give each payment a clear purpose

The initial franchise fee generally covers access to the business concept, the initial transfer of know-how, training and start-up assistance. Describe exactly what is included: the number of training participants, any travel, days of on-site support at opening and additional services charged separately.

The ongoing royalty covers, among other things, the right to use the brand’s identifying elements and continuing support. It may be a percentage of turnover, a fixed fee or a combination of several elements. No model is automatically better: a fixed fee places a heavier burden on a business that gets off to a slow start, while a percentage means your income varies with the franchisee’s turnover.

If you plan to charge a separate advertising contribution, specify how it will be used. Distinguish network-wide marketing from mandatory local spending and campaigns to recruit new franchisees. Provide regular reports on the expenditure funded by these contributions: transparency helps build trust.

Finally, list all other payments and income streams: software subscriptions, additional training, margins on supplies and payments received from suppliers. Even when they are not called royalties, they form part of the overall economic cost of joining the network.

3. Test viability on both sides

Build a prospective franchisee’s profit and loss forecast using data from your existing business, adjusting for advantages that cannot be replicated: a long-standing favourable rent, fully depreciated equipment, unpaid work by the founder or special purchasing terms.

Add all the proposed payments, then examine cash flow after operating expenses, the owner’s remuneration, loan repayments and equipment replacement. A profit does not guarantee sufficient cash.

Test several plausible scenarios without presenting them as promises:

• a slower-than-expected start after opening;
• higher staffing costs or rent;
• a temporary fall in sales;
• greater support needs than anticipated.

Then carry out the same exercise for your own organisation. Will ongoing royalties fund your commitments if franchisee recruitment slows? An organisation that depends on initial franchise fees to provide day-to-day support has a weakness that needs addressing before it expands.

Ask your accountant to review these forecasts. The aim is not to find the highest acceptable fee, but a balance that allows both businesses to meet their obligations.

4. Turn the calculations into contractual commitments

In France, there is no single statutory framework governing franchise agreements. The relationship is governed in particular by general contract law, competition law and intellectual property law.

Specific rules do, however, apply to pre-contractual disclosure. Article L. 330-3 of the French Commercial Code, introduced by what is known as the Doubin Law, applies where a trade mark, trading style or trade name is made available in return for an exclusive or near-exclusive commitment in carrying on the business. In such cases, the pre-contractual disclosure document and draft agreement must be provided at least twenty days before signing or, where applicable, before any advance payment. Article R. 330-1 specifies the information that must be disclosed.

Have the agreement define the basis for calculating royalties: turnover excluding VAT, treatment of refunds, online sales, payment deadlines, supporting records and verification procedures. It should also set out indexation arrangements, any minimum fees and optional services. Ask a legal adviser to check consistency between sales materials, pre-contractual disclosures and the agreement.

Key takeaway: before recruiting franchisees, link each payment to a clearly defined service, test its effect on both businesses’ cash flow and document its calculation unambiguously.