Franchise fee increases: plan predictable index-linked adjustments

When expanding an established business into a franchise network, setting the initial fees is not enough. You also need to decide how those fees may change over a relationship lasting several years. The franchisor’s costs may rise, but franchisees need predictable expenses. A well-designed indexation mechanism is not an ad hoc price increase: it means a calculation disclosed in advance, clear timing and billing that can be checked.

1. Distinguish indexation from new charges

Start by listing every recurring payment. Give the fixed franchise fee, turnover-based fee, any minimum fee and separately billed services their own entries. For each, state which obligation it relates to and what might justify a change.

Fixed fees and percentage-based fees behave differently. If a franchisee’s turnover grows because prices rise, the fee payable at an unchanged percentage rate may already increase. Automatically raising the percentage on top of this would create an additional burden. Do not, therefore, apply the same indexation logic to every fee component.

Assess the minimum fee separately too. When turnover is lower, it may determine the amount actually payable, so an increase can have a significant impact on the franchisee even when the percentage-based fee would remain unchanged.

Indexation may be intended to preserve the real value of an existing amount. A charge for a new IT service or a broader support package is a different matter. Do not conceal these behind an inflation adjustment: they need a separate justification and appropriate contractual provisions.

2. Write a formula the franchisee can check

The statement ‘the fee increases annually in line with inflation’ is not precise enough on its own. It does not identify the measure to use, the period it covers or when the new amount becomes payable. For operations in Hungary, one option is the annual average consumer price index published by the Hungarian Central Statistical Office (KSH), but the specific measure must be clearly identified.

The fee schedule should address at least the following:

• Starting amount: which fee, excluding VAT, forms the basis for indexation?
• Reference period: which year’s published figure applies?
• Frequency: when can the first and subsequent adjustments take place?
• Effective date: from which billing period is the new amount payable?
• Rounding: how is the calculated figure rounded for invoicing?
• Falling index: can the fee decrease, or are only increases permitted?
• Discontinued measure: what procedure will you use to select a replacement?

The calculation could work by multiplying the previous fee, excluding VAT, by the appropriate multiplier for the index specified in the agreement. Alongside the formula, explain in words how it is applied, particularly whether you are using the index itself or its rate of change.

If you agree to a cap, also clarify whether any increase prevented by that cap can be applied later. Set out separate arrangements for a new franchisee’s first adjustment to avoid an unexpected fee increase immediately after opening.

3. Align the right to change fees with Hungarian law

Hungary has no standalone, comprehensive franchise act, but franchise relationships are not unregulated. Act V of 2013 on the Civil Code expressly recognises franchise agreements. General contract rules are also relevant, including provisions on contract amendments and standard terms and conditions.

There is no general requirement specifically for franchises to register with a public authority, nor a standard mandatory pre-contractual disclosure document. Nevertheless, the parties still have duties to cooperate and provide information. Make the conditions for fee changes available before the agreement is signed, rather than revealing them in the first notice of an increase.

Applying a formula agreed in advance is not the same as a unilateral increase left to the franchisor’s discretion. A unilateral contract amendment requires a contractual provision or statutory authority; the validity and application of that provision need separate assessment. Do not treat a statement that the franchisor ‘may adjust fees when costs change’ as unrestricted authority.

The European Code of Ethics for Franchising emphasises clear contractual terms and the interests of network members. It is not legislation and does not replace legal review. Have the fee adjustment clause checked by a lawyer, particularly if you intend to use it as a pre-drafted standard term for every franchisee.

4. Test the rule before putting it in the contract

Run internal calculations for an unchanged, rising and falling index, as well as declining franchisee turnover. These are planning scenarios, not forecasts. Examine how the fixed fee, minimum fee and turnover-based amount interact. This may reveal that components which seem acceptable individually create an excessive burden when combined.

Next, prepare a notice template. Include the old fee, the measure used, the calculation, the new amount and the date from which it applies. Assign responsibility for checking the data, sending the notice and updating the billing system. The franchisee should also know whom to contact about a calculation error.

Practical takeaway: before signing your first franchisee, prepare a one-page fee adjustment schedule with a worked example. If the franchisor and franchisee cannot arrive at the same amount using the same rule, the clause still needs clarification.