Buying a Franchise: Check the Initial Fee Before You Commit

The initial franchise fee may fall due long before your business starts generating revenue. The amount is therefore not the only consideration: you need to understand what you receive in return, when payment is due and what happens if you cannot proceed. Clarifying these points before joining a franchise network will help you compare offers and avoid unnecessary cash flow risks.

1. Establish exactly what the initial fee covers

An initial franchise fee can cover various things: admission to the network, initial access to know-how, basic training or certain preparatory services. However, the name alone does not tell you what is actually included. What matters is the contract and any schedules validly incorporated into it.

Ask for a written breakdown. This does not necessarily mean putting a price on every hour of work. You do, however, need a clear distinction between what the initial fee covers and any services charged separately.

In particular, clarify:

• Which rights and services are fully covered by the fee?
• Which services require an additional payment?
• Are travel, accommodation or materials charged separately?
• Does the fee cover one location or additional outlets as well?
• Is the quoted amount exclusive of any applicable VAT?

Watch out for duplicate charges: If, for example, basic training is advertised as part of the initial fee, the contract should explain why a separate training charge also applies. An additional charge is not automatically unlawful, but there must be a clear practical and contractual basis for it.

Compare brands on the basis of the full package. A lower initial fee may offer poorer value if many essential services have to be paid for separately.

2. Assess payment deadlines alongside your cash flow needs

The size of a fee and the timing of its payment pose two different risks. An initial fee payable in full when you sign the contract puts pressure on your cash flow sooner than payment in agreed instalments.

Enter the actual payment dates into your funding plan. Also allow for the rental deposit, fit-out, stock and ongoing expenses during the preparation period. Do not assume that a potential input VAT refund or future sales revenue will arrive in time to pay the initial fee. Discuss the tax treatment and timing with your tax adviser.

Ask whether payments can be linked to clearly defined milestones. For example, the contract could provide for instalments on signing and after specified handover or training services have been delivered. There is no general statutory right to such instalments in Germany; they must be negotiated.

Also examine any reservation payment or upfront charge separately:

• Will it be credited in full against the initial fee?
• What specific obligation does the franchisor undertake in return?
• When does the reservation expire?
• Under what conditions will the money be refunded?

Do not transfer money solely on the strength of a verbal promise. The recipient, contractual basis and purpose of the payment should all be clear.

3. Agree refund terms for specific situations where the venture cannot proceed

The statement ‘initial franchise fees are generally non-refundable’ is no substitute for a proper legal assessment. Equally, you cannot assume that the full amount will automatically be returned if the business never opens.

Relevant factors include the contractual terms, services already delivered and the reason the venture cannot proceed. A fee for rights already granted may be treated differently from an advance payment for services not yet delivered.

Before signing, have the implications of different scenarios reviewed: you cannot find suitable premises, essential funding falls through, the franchisor cannot deliver a promised service, or you decide not to proceed for personal reasons. In each case, it should be clear whether there is a way to withdraw and what the financial consequences would be.

Expressly agreed refund provisions that distinguish between services already delivered and those still outstanding can be useful. They should also address the timing and calculation of any refund. A verbal promise of goodwill is no substitute for a contractual entitlement.

4. Understand the German legal framework

Germany has no dedicated franchise law, no specific statutory fee schedule for franchise agreements and no government franchise register. Nor is there a generally applicable statutory standard form that comprehensively governs initial fees and refunds.

The general provisions of the German Civil Code (Bürgerliches Gesetzbuch, or BGB) are particularly relevant. Duties to have regard to the other party’s interests and to disclose relevant information arise during contract negotiations, notably under sections 311(2) and 241(2) BGB. Material information about costs and what is provided in return must not be presented misleadingly.

Standard contract terms are generally subject to sections 305–310 BGB, although special rules apply in business-to-business dealings. Not every pricing provision can be reviewed for whether it represents a fair price. However, unclear ancillary terms, blanket forfeiture clauses or exclusions of refunds may raise legal issues. Have the precise wording reviewed by an independent lawyer.

The European Code of Ethics for Franchising is a self-regulatory instrument, not legislation. It is no substitute for reviewing the contract or agreeing individual payment terms.

Practical takeaway: Pay the initial franchise fee only once the rights and services covered, payment deadlines and any potential refund arrangements are clearly set out. What matters is not the lowest entry price, but a clear agreement that suits your cash flow and the services you actually need.