Initial franchise fee: what should it cover, and when is it refundable?

When expanding an established business into a franchise network, charging a one-off initial fee is a natural step. The challenge is not simply deciding how much to charge: you need to make clear which rights and start-up services the franchisee receives in return, when the franchisor will deliver them, and what happens if the business never opens. A well-designed fee is not a vague admission charge, but a transparent payment for defined rights and services.

1. Define what the fee covers before setting the amount

Do not start with your competitors’ fees. First, list what you provide once, as part of joining the network, and what you will continue to provide afterwards. Brand use, transferable business know-how and support are interconnected in a franchise network, but that does not mean every item should be hidden within a single unexplained sum.

Prepare an internal fee breakdown with the following columns:

• Right or service provided: for example, the right to use the system, initial training or on-site support before opening.
• Exact scope: who can take part, how many sessions are included and what will be delivered.
• Delivery date: when the know-how becomes accessible or the service is provided.
• Evidence of delivery: which document demonstrates that the commitment has been fulfilled.
• Items charged separately: for example, travel, training for additional participants or repeat site visits.

Do not bundle opening stock, equipment, rental deposits and third-party service fees into the initial franchise fee. These are separate supplies, with different parties responsible for the costs and potentially separate contractual terms. The franchisee needs to see the total start-up funding requirement, not just the amount payable to head office.

In your internal calculations, distinguish previous investment in developing the system from the actual cost of onboarding the individual franchisee. Pricing is a commercial decision, but do not build a fee model that leaves you relying on the next franchisee’s payment to fulfil promises made to the current one.

2. Align the legal basis of the fee with Hungarian rules

Hungary has no standalone franchise act covering every aspect of franchising, but that does not mean franchise agreements are unregulated. Sections 6:376–6:381 of Act V of 2013 on the Civil Code contain provisions governing franchise agreements. The arrangement includes permission to use specified rights and protected know-how, together with the franchisee’s obligation to pay fees.

The Hungarian Civil Code does not set a mandatory initial fee or prescribe a generally applicable fee tariff. The parties must establish the structure of one-off and ongoing fees themselves. General contract rules also apply, including duties to cooperate and provide information during contract negotiations, as well as the consequences of breach of contract.

Hungary has no general franchise disclosure regime requiring a dedicated disclosure document and a fixed waiting period. That is no reason, however, to leave applicants unaware of what the fee covers or its conditions until they sign. The European Code of Ethics for Franchising is a self-regulatory standard, not legislation; whether it applies or has been adopted must be considered separately.

Ask your lawyer and accountant to review the same itemised fee description. Invoicing, VAT treatment and accounting cannot be determined simply by calling a payment an ‘initial franchise fee’. What matters is its substance and the conditions governing delivery.

3. Link payments to verifiable milestones

A single payment on signing is straightforward, but it can place significant risk on the franchisee if launch depends on several conditions. Consider instalments aligned with the franchisor’s expenditure and the stages of delivery.

Possible milestones include the agreement taking effect, specified usage rights becoming available, completion of training or completion of start-up support. These are not statutory milestones: they should be designed around your own operation. For each instalment, make clear when payment is due and what is being delivered in return.

Do not automatically describe an upfront payment as foglaló, a Hungarian form of contractual deposit. Under the Hungarian Civil Code, it carries specific legal consequences, and its purpose must be clear from the agreement. An advance payment, a reservation fee and payment for a service already delivered are not interchangeable concepts.

Evidence of delivery should be easy to follow: records of access being granted, training attendance, an assessment supplied or an on-site support report. This should be more than a signature-collecting exercise; it should show what actually happened.

4. Agree what happens if the launch falls through before accepting payment

The statement ‘the initial franchise fee is non-refundable under any circumstances’ is no substitute for a properly considered financial settlement. Distinguish between the franchisee changing their mind, the franchisor failing to deliver and a precondition not being met, such as suitable premises not being secured.

For each scenario, agree how to establish which rights have already become available, which services have been delivered, what justified costs have been incurred and how the financial settlement will be handled. A refund need not be all or nothing: the appropriate outcome depends on the contract, what has been delivered and why the launch fell through.

Also address deadlines, supporting documents for the settlement and the subsequent handling of materials already supplied. The method for deducting costs should be clear in advance, rather than based on an arbitrary list drawn up afterwards. Have a lawyer review the clauses, particularly in relation to standard terms and conditions and limitations of liability.

Practical takeaway: before the first payment, prepare an agreed fee schedule setting out what is included, when payments are due, how delivery will be evidenced and how accounts will be settled if the launch falls through. If this cannot be explained clearly, the initial fee is not yet ready.