Franchising your business: setting the initial franchise fee

Turning an existing business into a franchise network means working out what it takes to bring a new business owner on board. The initial franchise fee should neither be copied from a competing brand nor set simply to plug a cash-flow gap. It should form part of a clearly defined, commercially sound offering that prospective franchisees can readily understand. Here is how to develop it before recruiting your first franchisee.

1. Define exactly what the initial franchise fee covers

The initial franchise fee is a lump sum commonly charged to join a franchise network. It may cover the initial transfer of know-how, initial training and start-up support. Whether a fee is charged, and how much it is, are matters for the contract: France has no general statutory fee scale applying to all franchises.

Start by listing the services you will provide to each new franchisee. For each one, specify what it includes, who receives it and where its scope ends:

• initial training for the business owner, including the number of participants covered;
• provision of, and an introduction to, the tools needed to run the business;
• support in preparing for opening;
• on-site support at launch, within a defined scope.

Then identify any excluded expenses: the prospective franchisee’s travel and accommodation, training for additional employees, equipment, software or third-party services, depending on your model.

Prospective franchisees should be able to understand what they are buying without having to piece together your offering from several sales conversations. A phrase such as ‘comprehensive support’ is not enough if nobody knows where that support begins and ends.

2. Calculate the cost of onboarding without confusing cost and value

Using your existing business as a starting point, work out the tasks involved in bringing an independent operator on board. Put a value on the founder’s time, even if it is not yet paid for separately. Otherwise, you risk setting a fee that will never allow you to delegate this work.

Your internal calculation can distinguish between three categories:

• Costs directly associated with joining: delivering training, your team’s travel, setting up access to systems and providing initial support.
• Reusable resources: developing training materials and onboarding tools, with costs spread across a conservative estimate of new franchisees joining.
• The value of the business concept being transferred: proven know-how, the quality of your methods and the usefulness of the tools provided.

This final category does not justify an arbitrary mark-up. A relatively unknown brand cannot be presented as having established nationwide recognition.

Next, test the proposed fee against the franchisee’s start-up budget. Even a fee correctly calculated from the franchisor’s perspective can undermine a launch if it absorbs too much of the available funding. The aim is to support a lasting relationship, not to maximise the initial cash received.

3. Separate the initial payment from ongoing charges

The initial franchise fee and ongoing fees serve different purposes. Ongoing fees cover, among other things, the rights and services provided throughout the contractual relationship, as agreed in the contract.

Create an internal table with three columns: service, the payment covering it, and the relevant period. This check helps identify overlaps and grey areas. If initial training is advertised as included in the initial franchise fee, an additional charge should not subsequently appear without a clearly agreed basis.

Also explain how additional services will be handled, such as support requested beyond the package, training for a new team or an extra support visit. Their prices, or the method used to calculate them, should be understandable before any commitment is made.

Finally, do not rely indefinitely on fees from new franchisees to fund support for existing ones. This dependency would create recruitment pressure at odds with carefully selecting members of your network.

4. Set clear disclosure requirements and payment terms

In France, franchise agreements are governed, among other things, by general contract law. Where the relevant conditions are met, pre-contractual disclosure is regulated by Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law, and Article R. 330-1.

These provisions apply where a trade name, trade mark or trading identity is made available alongside an undertaking of exclusivity or near-exclusivity for the business activity. In such cases, the pre-contractual disclosure document and draft agreement must be supplied at least twenty days before signing or, where applicable, before any required advance payment. Splitting the initial franchise fee into instalments does not circumvent this waiting period.

Have the contract specify the amount excluding tax, the applicable tax treatment, payment dates and the corresponding services. Also have a legal adviser review what happens to payments already made if the project does not proceed: a blanket ‘non-refundable’ clause does not resolve every legal situation.

Key takeaway: before setting your initial franchise fee, prepare a breakdown of the services included, a cost calculation and a contractual payment schedule. Have your accountant and legal adviser check that these are consistent.