Planning Franchise Fees for an Existing Business

Running a successful business of your own does not, by itself, tell you what fees will sustain a franchise network over the long term. The franchisor must fund support for franchisees, while each franchisee must retain enough money to run and develop the business and earn an income. So, rather than copying competitors’ fee percentages, start by preparing two linked financial plans.

1. Separate start-up costs from ongoing support costs

First, list the tasks you will undertake when a new franchisee joins. These may include assessing the location, preparing for opening, providing initial training and offering on-site launch support. Assign working hours, internal costs and external expenses to each item. The founder’s time is not free either: use the cost of employing a suitable person to do the same work in future.

Then identify ongoing support costs separately: franchisee visits, specialist advice, quality control, IT infrastructure and network meetings. It is unwise to fund these solely from new franchisees’ initial fees. If a slowdown in new agreements would leave you unable to fund support for existing franchisees, the model is vulnerable.

A practical worksheet: for each service, record its frequency, who is responsible, its cost and the type of fee that funds it. Also distinguish between costs incurred per franchisee and shared costs. This will show how each new franchisee affects the finances.

Take previous development expenditure into account too, but do not automatically expect the first franchisee to cover the entire cost of building the system. You also need to assess separately whether the fee represents commercial value and is affordable.

2. Make clear what each fee covers

For the initial franchise fee, explain which rights and services the franchisee receives at the outset. Specify what is excluded, such as fitting out the premises, opening stock, travel expenses or obtaining a permit from an external authority. The initial franchise fee is not the same as the total start-up capital required.

The ongoing franchise fee may be a fixed amount, a percentage of turnover or a combination of the two. No single approach is inherently right. A fixed fee is easier to budget for, but can place a greater burden on a business when turnover is low. A turnover-based fee tracks sales more closely, but requires verifiable data and precise calculation rules.

If you apply a minimum fee, test its impact during the initial growth period and seasonal downturns. What provides predictable income for the franchisor remains a payment obligation for the franchisee, even when fewer customers come through the door.

Manage the marketing contribution transparently. Define what it may be spent on, how its use will be reported and how any unspent balance will be handled. Specify whether franchisees must also spend money on local advertising. Likewise, identify any technology, further training or renewal fees you intend to charge.

3. Check the franchisee’s overall financial headroom

Start with figures from your own business, but adjust them where necessary. If you currently manage the outlet as an owner without drawing a salary, the franchisee’s plan must still include a realistic cost for that management work. Allow for market rent, maintenance, insurance and working capital too.

Prepare at least a base-case, an adverse and a favourable scenario. Do not just vary revenue: examine the impact of wages, purchase prices and delays to opening. Check separately when fees fall due and when the franchisee actually receives cash.

The analysis should answer three questions:

• Will an operating reserve remain after all franchise fees have been paid?
• Can the business fund necessary equipment replacement and pay the owner for their work?
• Can the franchisor provide the promised support at the planned number of franchisees?

Do not overlook the financial impact of mandatory purchases. If the franchisor also earns a margin on product sales, assess that cost to the franchisee alongside the franchise fees. An apparently attractive fee percentage does not, on its own, prove that the arrangement is sustainable.

4. Make contractual fee calculations and payment terms clear

Hungary has no standalone franchise act, but franchise agreements are not unregulated: Act V of 2013, the Hungarian Civil Code, governs franchise agreements in Section 6:376 onwards. The Civil Code’s general contractual rules also apply, including duties to cooperate and provide information. There is no general mandatory franchise registration requirement or legally prescribed standard franchise disclosure document. However, this does not remove the need to clarify material financial terms.

For turnover-based fees, agree precisely what forms the calculation basis. How will you treat VAT, refunds, discounts, gift cards and orders received through intermediary platforms? Do not leave it unclear, for example, whether a platform’s commission reduces the amount on which the fee is calculated.

The agreement should cover reporting requirements, verification rights, invoicing, payment due dates and the correction of calculation errors. If fees can change, make the conditions, calculation method and notice period clear. Have an accountant check the tax treatment of the fees and a lawyer with franchise experience review the legality of the terms.

Practical takeaway: before recruiting franchisees, prepare a fee schedule, two aligned financial plans and precise rules for calculating, reporting and paying fees. Only introduce a fee if you can explain its purpose and have assessed its financial impact on both parties.