Setting Sustainable Franchise Fees and Royalties

Setting franchise fees is not simply a matter of matching other brands’ rates. For business owners looking to build a franchise network in Indonesia, fees must fund meaningful support while leaving franchisees room to make a profit. This guide focuses on structuring initial fees and royalties: what to include, how to test their viability and what to clarify before offering a franchise.

1. Separate the cost of joining from the cost of running an outlet

Start by mapping out all the costs a prospective franchisee will face. Do not describe a single price as an “all-inclusive package” if essential items are still excluded.

Distinguish at least these four categories:

• Initial franchise fee: payment for the rights and initial services specified in the agreement, such as pre-opening training, support with preparations and initial access to the business system.
• Outlet investment: refurbishment, equipment, supplies, opening stock and premises-related requirements.
• Working capital: funds to cover operating costs while cash inflows are not yet stable.
• Recurring payments: royalties, marketing contributions, software fees and any other mandatory services.

For each category, state who receives the payment, when it is due, what is included and what is excluded. Also clarify whether prices include applicable taxes or whether tax must be added.

Next, calculate the actual cost of bringing a new franchisee on board. Include trainers’ time, travel for the opening team, setting up system access and administrative work. The initial fee should not simply serve as a source of cash to cover shortfalls in head office operations.

If the package includes equipment or stock, itemise these separately. This transparency helps prospective franchisees compare investment requirements without confusing the price of goods with the fee for franchise rights.

2. Calculate royalties based on support needs and outlet affordability

Royalties need to be assessed from two perspectives: the franchisor’s need to provide ongoing support and the outlet’s ability to pay. A rate that looks attractive to head office can undermine franchisees if it is set without considering outlet cash flow.

Prepare an annual support budget covering ongoing training, advisory visits, quality monitoring, product development and system management. Separate routine expenditure from specialist work that may be charged for separately. Do not use the same cost to justify both royalties and additional service charges without explaining why.

Then prepare outlet profit and loss and cash flow projections using data from your own business. Include the cost of goods sold, a reasonable manager’s salary, rent, utilities, payment processing fees, sales platform deductions, applicable taxes and all payments to the franchisor.

Test the projections under normal sales conditions, lower sales and increases in major costs. Check whether the outlet can still pay suppliers, replace equipment and maintain working capital after paying royalties. Projections are not a guarantee of results and must be accompanied by assumptions you can explain.

Do not set royalties solely on the turnover of your best-performing outlet. Use a performance profile that reflects differences in location and operating costs. If the model only works at very high sales levels, revise the fee structure or support arrangements before offering it to prospective franchisees.

3. Define the calculation basis to avoid disputes

Sales-based royalties require a precise definition of sales. The term “net turnover” alone is not enough, as each party may interpret it differently.

When drafting payment terms, answer the following questions:

• Are taxes collected from customers included in the calculation basis?
• How are cancellations, refunds and discounts treated?
• Are platform sales calculated before or after the platform’s commission?
• When is a sale recognised: at the time of the transaction, delivery of the goods or receipt of payment?
• How are transactions between outlets and transferred orders recorded?

If you choose a fixed royalty, explain how payments apply when an outlet is temporarily closed or has not yet started operating. If you combine a fixed fee with a percentage, show the calculation sequence clearly to avoid double charging.

Also specify reporting schedules, payment deadlines, transaction data sources, correction procedures and audit rights. For marketing contributions, explain how the funds will be used and what reporting franchisees will receive. Distinguish the shared promotional fund from royalty income so that both parties’ expectations are aligned.

4. Align your fee offering with Indonesian regulations

The key legislation to consider is Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. This regulation makes ongoing support one of the criteria for a franchise. Royalty structures therefore need to reflect the capacity to provide support, rather than merely the right to use a business name.

Government Regulation No. 35 of 2024 also requires franchise agreements to specify fee payment procedures. Ensure that all payment obligations, calculation bases, fee changes and consequences of late payment are explained consistently in the offering documents and the agreement. Ask legal and tax advisers to review the wording.

Franchisors must hold a Franchise Registration Certificate, known as a Surat Tanda Pendaftaran Waralaba or STPW, before entering into a franchise agreement. The franchise offering prospectus, in Indonesian, must be provided to prospective franchisees at least 14 calendar days before signing. Use this review period to explain the fee structure, rather than pressuring prospective franchisees to pay immediately.

Practical next step: before offering franchises, prepare a complete fee schedule, a support budget and outlet cash flow scenarios. If these three elements do not yet align, revise the payment model first so that your franchise network can grow through healthy business relationships.