Franchising: how to set the initial franchise fee

When you turn an existing business into a franchise network, the initial franchise fee should not be a figure chosen simply by looking at competitors. It needs a clear commercial rationale, consistent with your proven business model and what you actually provide to franchisees. Setting it properly means distinguishing between the value of joining the network, the initial support package and the services paid for throughout the relationship.

1. Start with the purpose of the fee, not the amount

Italian Law No. 129 of 6 May 2004, which governs franchising in Italy, defines the initial franchise fee as a fixed sum, linked in part to the network’s economic value and growth potential, which the franchisee pays when signing the agreement. The law sets neither a scale of charges nor a minimum amount.

The initial fee is separate from royalties, which may be calculated as a percentage of turnover or charged as a fixed amount. Do not confuse access to the business model with ongoing payment for support. The fee structure must be explicit, not assumed.

Article 3 requires the agreement to be in writing to be valid. It also requires it to expressly state the investment and any entry costs the franchisee must incur before starting the business. The same provision requires the franchisor to have tested its business model in the market.

For a business taking on its first franchisee, this calls for a practical precaution: do not price the fee as though you already have a geographical presence or brand recognition that you have yet to build. You can charge for a proven method, but you must distinguish that existing asset from future prospects.

2. Draw up a breakdown of the initial services

Before setting the price, list what the new franchisee will receive when joining. Describing it as a ‘complete package’ is not enough: the services must be identifiable and their scope clearly defined.

An internal breakdown can include the following for each item:

• Service: what is actually provided.
• Responsibility: who must carry it out or deliver it.
• Quantity and timing: days, sessions, documents or other measurable units.
• Inclusions and exclusions: travel, materials, external services and additional activities.
• Cost to the franchisor: internal staff time, purchases and directly attributable expenses.

For example, if you include on-site support at launch, specify how many days are covered, which activities are involved and how travel expenses will be treated. If you include initial access to operational tools, distinguish setup costs from subsequent subscription or licence fees.

The fee can also cover access to know-how and the business model: it does not necessarily have to equal the sum of your direct costs. However, understanding those costs helps you avoid selling a package of services that the franchisor cannot deliver without making a loss.

Finally, flag any items charged separately. Equipment, stock or third-party services should not appear to be included simply because they feature alongside the initial franchise fee in your sales presentation.

3. Check that it is sustainable for both parties

The fee needs to be considered from two perspectives. For the franchisor, it should help cover the onboarding process without leaving each new opening financially underfunded. For the franchisee, it is an outlay that reduces the cash available to launch and run the business.

Carry out two separate checks. First, compare the fee with the cost of the services promised. Second, include it in the franchisee’s initial funding requirements, remembering the working capital needed during the start-up period. A seemingly affordable fee can prove expensive if many essential services are excluded.

Do not routinely rely on new franchise fees to fund the support owed to existing franchisees. As a management principle, check that the network’s day-to-day operations remain financially sustainable even during a period with no new franchisees joining.

If you plan to offer preferential terms to your first franchisees, document the reasons: the scope of services, the network’s stage of development or specific agreed commitments. Avoid ad hoc discounts that make the standard price difficult to justify. Preferential terms should not conceal reduced services or pass undeclared costs on to the franchisee.

4. Make the price clear and verifiable before signing

Turn your financial breakdown into precise contractual terms: the amount, applicable tax treatment, payment deadline, services included and separate charges. Also have a professional review the consequences of any services not being delivered or a planned opening not going ahead. A generic phrase such as ‘the fee is non-refundable in all circumstances’ is no substitute for examining the parties’ responsibilities and the applicable law.

Article 4 of Italian Law No. 129/2004 requires the prospective franchisee to receive a complete copy of the agreement to be signed, together with the annexes required by law, at least 30 days before signing. The fee and what it covers must therefore be clear at this stage, rather than explained only when payment is due.

Before proposing the initial franchise fee, ask someone unconnected with the project to read the breakdown: can they tell how much they must pay upfront, what they receive and which costs are excluded?

In practice: set the fee only after documenting the value, services and costs. A price you can explain helps build a franchise network founded on realistic expectations.