Initial franchise fees: defining services and payment terms

If you are developing an existing business into a franchise network, you need to be able to explain the initial franchise fee: what does a new partner receive in return, when is payment due, and what happens if the business never opens? A flat fee with no clear link to the services provided creates unnecessary scope for disputes. The key is to establish a clear connection between the agreed start-up package, the work actually carried out before opening and the payment terms.

1. Separate the start-up package from ongoing services

In franchising, the one-off initial fee is usually associated with services provided at the outset and the grant of usage rights. Ongoing fees, by contrast, generally cover the continuing relationship, including support and development. German law does not prescribe how these should be divided. You therefore need to define clearly which services and rights each fee covers.

Start with an internal list of services. For each item, record what will be delivered, who is responsible and when it should be completed. Possible components include:

• the initial transfer of the know-how needed to run the business;
• setting up agreed access and providing start-up documentation;
• clearly specified support in preparing the business to operate;
• agreed support around the opening;
• the contractual grant of the intended usage rights.

This list is not a universal set of requirements. It must suit your franchise concept. If initial training is charged separately, for example, it must not also be presented as fully included in the initial fee.

Practical check: Could a prospective franchisee identify all additional charges from your offer alone? If not, the distinction is not clear enough. This also applies to travel, accommodation and third-party service costs.

2. Base the fee on your own costs and workload

Do not simply copy the initial fee charged by a well-known brand. Its service offering, brand recognition and organisational structure may have little in common with your emerging franchise concept. Instead, draw on the experience of your existing business and identify the additional work involved in bringing an independent partner into the network.

Distinguish between three types of cost:

1. One-off concept development: for example, the initial development of processes that can be replicated. These costs do not arise afresh for every partner.
2. Partner-specific start-up services: such as individual preparation, set-up and agreed opening support.
3. Ongoing support: services provided repeatedly after launch, which should generally be factored into your ongoing financial calculations.

Development costs can legitimately inform your pricing. However, they should not be presented as start-up services delivered specifically to an individual partner. Equally, the initial fee is not necessarily just reimbursement of costs: the value of the rights granted and the proven business concept can also influence the price.

Prepare an internal calculation covering staff time, external costs and allowances for realistic variations. Also assess whether the fee, together with all other start-up expenses, appears affordable for the partner. A high initial fee is no substitute for a proven concept or a financially sustainable relationship.

3. Plan payment dates and launch delays together

The amount of the fee and the timing of payment are two separate decisions. German law requires neither full payment on signing nor any particular instalment schedule. What is appropriate and legally enforceable depends on the contract and the services actually provided.

One possible approach is a payment schedule linked to clearly defined milestones. One portion might fall due when the contract begins, and another when agreed start-up services are provided. This is an example of how payments could be structured, not a standard legal solution. Avoid vague triggers such as ‘following successful preparation’ if there is no agreed way to measure that success.

In particular, clarify the following in advance:

• What happens if finding premises or obtaining a permit is delayed?
• Which services will begin before the opening is confirmed?
• Who may authorise additional chargeable work?
• What happens if either party fails to deliver what it is contractually required to provide?
• How will amounts already paid be treated if the contract ends?

Keep clear records of services delivered, including handovers, dates and evidence of completion. These records make it easier to resolve questions later, but they do not replace enforceable contractual provisions. Whether money must be repaid cannot be settled simply by stating that the initial fee is generally non-refundable.

4. Have the terms reviewed under German law

Germany has no standalone franchise statute and no dedicated government franchise registration scheme. Fee agreements are governed in particular by the general provisions of the German Civil Code (BGB). Pre-drafted contract terms must comply with sections 305 et seq. BGB, including the specific rules applicable to business-to-business dealings. In particular, clauses must be transparent and must not unreasonably disadvantage the other party.

Pre-contractual disclosure duties can arise during negotiations under sections 311(2) and 241(2) BGB. Information about the initial fee, the services included and additional financial commitments must therefore be accurate and must not be misleading. Germany does not prescribe a general franchise-specific disclosure form or a uniform statutory period for reviewing a franchise offer.

The European Code of Ethics for Franchising is a self-regulatory instrument, not legislation. It also serves as the code of ethics for members of the German Franchise Association. Nevertheless, have your specific fee provisions independently reviewed by a lawyer and seek professional advice on their tax treatment.

Practical takeaway: Before making your first contractual offer, prepare a service schedule, an internal fee calculation and a clear payment plan. If these three documents are consistent with the contract, both parties will be able to understand the basis of the initial fee.