Calculating Franchise Fees: A Guide for Business Founders

If you want to turn your existing business into a franchise network, you need a financially viable fee model. It must fund the services provided by head office without putting excessive financial pressure on franchisees. The key is therefore not what percentages others charge, but which services you actually provide and what each side has left after all costs. This guide shows you how to build a clear, well-founded calculation on that basis.

1. List your services before setting your fees

Start by listing the services you will provide to your future franchisees. Distinguish between one-off support when they join and ongoing support. Assign responsibility for each service, estimate the time required and allocate a cost.

One-off services might include assessing a location, preparing for opening, initial training and on-site support during the first few days of trading. Ongoing services could include business advice, quality assurance visits, further training and the development of shared products and services.

Include costs that have previously gone unrecognised: your own advisory time is not free simply because you fit it around your work in the existing business. Central software, external professional advice and cover for sickness also need a budget.

Then divide the costs into three groups:

• Head office fixed costs: These arise regardless of the number of franchisees, such as basic administrative infrastructure.
• Costs per franchise business: These increase with every new location, such as individual support or user licences.
• Step costs: These arise when extra capacity becomes necessary, such as hiring another franchise support adviser.

Do not assume you will have a large network from the outset. Assess separately how you will fund head office during the start-up phase. Any temporary shortfall needs your own capital or another reliable source of finance, not simply the hope of signing more franchise agreements.

2. Separate the initial fee, ongoing fees and levies

The initial franchise fee should have a clear connection to access to the business concept and the agreed start-up services. Specify when it becomes payable and which services it covers. Also set out what happens if the search for premises fails or the business does not open. A blanket statement such as “generally non-refundable” is no substitute for a legally reviewed provision.

The ongoing franchise fee primarily funds continued use of the franchise system and the agreed support. Several models are possible:

• A turnover-based fee grows with the business, but can place a heavy burden on businesses with low margins.
• A fixed fee makes planning easier, but imposes a proportionately greater burden during the early stages when turnover is low.
• A combination can bring the two approaches together, but can quickly become more complicated to explain.

For a turnover-based fee, the basis of calculation must be unambiguous. What exactly does “net turnover” mean? How will you handle discounts, returns, vouchers, delivery sales and sales through central online channels? In particular, clarify which business each sale is attributed to and whether intermediary commissions reduce the amount on which the fee is calculated.

Advertising levies should be presented separately. Explain how the money may be used, who has decision-making authority and how spending will be reported. Franchisees should be able to see whether their contributions fund shared campaigns, agency services or other expressly agreed activities. Also specify how unspent funds will be handled.

Explicitly list any additional compulsory costs for software, training, purchasing or technical equipment. What matters financially is the total cost burden, not just the advertised franchise fee.

3. Run the numbers for both sides

Prepare two linked financial calculations: one for a typical franchise business and one for head office. Use well-founded assumptions drawn from your existing business, adjusted to reflect the conditions of an independently operated franchise location.

For the franchise business, first deduct the cost of goods or direct service delivery costs, staffing, rent and other operating expenses from turnover. Then account for all franchise system fees. Also assess financing commitments, necessary replacement investment and reasonable remuneration for the owner's own work. A surplus on paper does not automatically mean freely available cash.

Test at least the following scenarios:

• Opening is delayed while costs are already being incurred.
• Turnover grows more slowly than expected.
• Staffing or purchasing costs rise.
• Supporting a franchisee takes significantly more time than planned.

For head office, compare recurring fee income with the services that must be provided on an ongoing basis. Initial franchise fees should not become a permanent substitute for insufficient recurring income. Otherwise, support for existing franchisees will depend on continually recruiting new ones.

Finally, record the conditions under which your model is viable and when you would need to put expansion on hold.

4. Agree fees transparently and on a sound legal footing

Germany has no dedicated franchise law and no general government franchise registration requirement. The main applicable legislation includes the German Civil Code (BGB), including its rules on standard terms and conditions, as well as commercial, antitrust and competition law, depending on the arrangement. Trade mark law also applies to trade mark licences.

Even without specific disclosure legislation, pre-contractual disclosure duties exist. These arise in particular from the duties to protect and have regard for the other party's interests under sections 311(2) and 241(2) of the BGB; breaches can give rise to claims for damages. You should therefore disclose fees and known material compulsory costs accurately, clearly and in good time. There is no uniform statutory franchise disclosure period.

The European Code of Ethics for Franchising is not law. It provides a voluntary framework and, as an association standard, is particularly relevant to members bound by it.

Have a specialist lawyer review fee clauses, payment due dates, billing and verification rights, and mechanisms for subsequent adjustments. An unrestricted right to increase fees unilaterally is not a reliable planning tool. Make sure the agreement, fee schedule and franchise sales materials are consistent.

Practical conclusion: Only approve your fee model once every payment is linked to a clearly defined service or right, both the franchise business and head office pass financial stress tests, and all compulsory costs are documented clearly.