Franchising a Hong Kong Business: How to Set Franchise Fees Based on Opening Support Costs

Having profitable outlets does not mean that a one-off franchise fee will cover the head office support needed to open a franchised outlet. Before building a franchise network in Hong Kong, businesses should cost the work of helping each franchisee open as a separate project. This guide focuses on the cost breakdown behind the initial franchise fee, rather than assuming that future management fees or supply revenue will make up any shortfall in opening costs.

1. Define exactly what the franchise fee buys

The Trade and Industry Department’s business start-up information notes that franchise arrangements generally involve an initial franchise fee, followed by ongoing service fees and other expenses. Both affect the franchisee’s total investment, but they should not be bundled into a single charge with no clear boundaries.

Head office should first list what the initial franchise fee includes: for example, initial onboarding onto the brand’s systems, guidance on preparations for opening, initial training for a specified number of people, and an agreed level of on-site support at launch. Each item should specify the deliverables, number of sessions, number of participants or scope of work. Simply promising “support throughout” is not enough.

List excluded expenses separately, such as rental deposits, fit-out works, equipment, opening stock, external professional fees and third-party system subscriptions. If head office arranges these on the franchisee’s behalf, distinguish between expenses paid on their behalf and service fees charged by head office.

The right to use the brand may extend throughout the relationship, so avoid describing the entire franchise fee as an “opening service cost”. The cost breakdown supports pricing decisions; the contract must accurately explain the rights and services provided in return for the fee. These serve different purposes.

2. Build a per-outlet cost breakdown using pilot records

Do not simply ask the person in charge roughly how much time it takes to open an outlet. During a pilot opening, or the next company-owned outlet opening, record the hours worked, external expenditure and reasons for any rework against each task. Then assess which tasks will still be needed under a franchise model.

Costs can be divided into three groups:

• Direct costs per outlet: Training staff’s time, travel for opening support staff, production of training materials, system configuration and necessary external services.
• Allocation of shared investment: Standard training content, opening tools and core systems developed for the franchise programme. Set a reasonable allocation method rather than assuming a large number of new outlets will open in the short term merely to keep the quoted fee low.
• Identifiable additional scenarios: Extra training, rescheduling, repeat site visits or configuration work beyond the standard scope. Estimate these costs first, then decide whether to absorb them within the standard fee or quote for them separately.

In-house staff time is not free. Labour costs can include salaries and related employment costs. If the founder delivers training personally, estimate what it would cost to have a suitably qualified person take over. Otherwise, the franchise programme may remain dependent on the founder’s unpaid work.

Data from a company-owned pilot outlet is only a starting point. Franchisees typically need additional explanations, confirmations and coordination. Record these differences separately rather than simply copying the opening costs of a company-owned outlet.

3. Compare scenarios rather than relying on optimistic recruitment targets

Once the cost breakdown is complete, use “direct costs per outlet + a reasonable allocation of shared costs + a contingency allowance” as a pricing reference. Then consider the value of the brand licence, the services offered and a reasonable profit margin. This is a management tool, not a legally prescribed pricing formula. Nor does a higher cost base automatically justify charging franchisees more.

Review at least three scenarios: a standard opening, an extended preparation period and several outlets opening at the same time. For a standard opening, check whether the fee can fund the promised services. For a delayed opening, establish who bears the cost of repeated work. For simultaneous openings, check whether temporary recruitment or outsourcing will be needed, potentially increasing the cost per outlet.

Also test a low-recruitment scenario: if fewer outlets open than expected, will head office still have the resources to deliver support that franchisees have already paid for? If servicing existing franchisees depends on continually collecting fees from new ones, reassess the pace of expansion and funding arrangements.

Do not treat prospective gross profit from supplies, ongoing management fees or renewal income as guaranteed funding for opening support. Even if the first franchise opportunities are offered at a discounted fee, head office should approve a budget to fund the discount. It should not balance the books by cutting the training or on-site support originally promised.

4. Turn pricing decisions into a clear contract schedule

Hong Kong currently has no franchise-specific legislation and no dedicated mandatory franchise disclosure or filing regime. The requirements of mainland China’s Regulations on the Administration of Commercial Franchises should not be treated as rules governing local franchise arrangements in Hong Kong.

The absence of a dedicated regime does not mean that fees and franchise recruitment claims are beyond legal scrutiny. Franchise relationships are governed by common law contract principles and applicable legislation, including the Misrepresentation Ordinance. Where brand licensing and competition arrangements are involved, general legislation such as the Trade Marks Ordinance and the Competition Ordinance must also be considered in light of the circumstances.

Set out the scope of the fees in a schedule and have a Hong Kong lawyer review it alongside the franchise agreement. The schedule should clearly link each service to its scope of delivery, payment milestones, third-party charges, and the quotation and written approval process for work outside the agreed scope. A cost budget prepared by head office does not mean that the franchisee has agreed to bear every overrun.

For example, additional training should not automatically attract a charge. Training needed because a franchisee adds more participants is different from a replacement session needed because head office has not completed the original training. Franchise recruitment materials, quotations and contracts should also use consistent wording. Avoid verbal promises that “everything is included” when the schedule lists numerous mandatory extras.

Practical takeaway: First prepare a per-outlet opening cost sheet, then a list of what the franchise fee includes and excludes. Only announce fees formally to the franchise network once costs, delivery capacity and contractual commitments are aligned.