Franchising an Existing Business: Structuring Initial Fees and Pre-Opening Refund Rules

When turning an existing business into a franchise, you should not set the initial franchise fee simply by looking at competitors’ prices. The reasons prospective franchisees pay must correspond to what the franchisor provides. Money collected before premises or funding have been secured needs particular attention: what happens if the business cannot open? A clear fee breakdown and pre-opening settlement process help lay the foundations for a trusted franchise network.

1. Break down the initial franchise fee by what it pays for

Start by listing the rights, materials and work the franchisor will provide before opening. The label ‘initial franchise fee’ alone does not explain what the franchisee receives when they pay. Depending on what you actually provide, the breakdown might include:

• Granting the right to use the brand and business system
• Preparing an opening plan and providing individual advice
• Supplying pre-opening materials and helping the franchisee put them into practice
• Site visits and launch support

You do not need to charge separately for every item. Even if you invoice a single amount, however, your internal records should explain the amount allocated to each item and when it will be delivered. Check for overlap with support covered by ongoing royalties or separately charged training fees.

Records from opening company-owned outlets can help you assess costs. Add up staff time, travel and outsourced work, then include any additional explanations and checks needed when opening a franchised outlet. However, an initial franchise fee may also pay for rights, so total cost does not automatically determine an appropriate price. It is important to assess both the cost basis and the value the franchisee receives.

Treat security deposits separately from payments for support. State clearly what the deposit secures, which liabilities it may be applied against and when the balance will be returned. Do not simply treat it as another non-refundable payment alongside the initial franchise fee.

2. Separate payment dates from service completion dates

Next, map payment deadlines and service delivery milestones onto the process from application to opening. ‘Payment in full on the contract date’ is not the same as ‘all services deemed delivered on the contract date’.

Your tracking sheet should record each fee category, its amount, the conditions for invoicing, what will be provided, how completion will be verified and what happens if it is not provided. For site-visit support, for example, record the visit date, the staff member involved, the work carried out and the report given to the franchisee. For materials, record what was supplied and when. Your procedures should prevent staff from treating planned individual support as complete merely because materials have been sent.

Where premises or finance remain uncertain, consider whether you need to collect the full amount in advance. Options include splitting payment between contract signing and the start of preparations, or waiting until specified conditions are met before starting certain work. These are design choices that can reduce disputes over undelivered services, not blanket legal requirements.

If you charge an application fee or reservation payment, its name should not determine how you treat it. Before accepting payment, explain in writing whether it will be credited towards the initial franchise fee when the contract is signed, returned if the application is rejected, or subject to deductions if the applicant withdraws. Standardise the wording used by recruitment staff so they do not make different promises verbally.

3. Set settlement rules for each reason the business might not open

A single statement that payments are ‘non-refundable regardless of the reason’ does not provide a workable basis for handling cases. At a minimum, distinguish between withdrawal for the prospective franchisee’s own reasons, circumstances on the franchisor’s side and failure to meet conditions agreed in advance.

For example, if a prospective franchisee withdraws during preparations, check what has already been provided and what remains outstanding. If deductions will apply, specify the relevant services or costs and the calculation method in advance. Before deducting costs for work commissioned from third parties, check whether an order has actually been placed, whether it can be cancelled and whether a cancellation charge will genuinely arise.

Conversely, avoid treating the franchisor’s inability to provide promised support in the same way as a prospective franchisee’s voluntary withdrawal. Non-performance for which the franchisor is responsible may raise issues under Japan’s Civil Code, including termination, restitution and damages. A refund schedule alone should not be used to resolve all such issues.

If finance is refused or premises cannot be secured, do not automatically assign responsibility to either party: check the contractual conditions. Specify whether the agreement is conditional on finance approval, the deadline for confirming the outcome, the documents required if finance is refused and how far preparations should proceed in the meantime. For postponed openings, also set a deadline for resuming preparations and define when additional charges may arise.

The settlement procedure should identify the contact point, required documents, provision of a calculation statement, the refund deadline and responsibility for bank transfer charges. Rather than relying solely on ‘agreement through discussion’, establish criteria that allow different staff members to reach the same conclusion in routine cases.

4. Explain the terms in light of Japan’s disclosure duties and competition law

Japan has neither a comprehensive dedicated law governing all franchise relationships nor a universal registration system for franchisors. This does not mean franchising is unregulated: general laws, including the Civil Code, apply to franchise contracts.

Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to give prospective franchisees a document containing prescribed information and explain it before the contract is signed. For payments collected on joining, the information must cover matters such as the amount, nature and timing of collection, and whether refunds are available and on what terms. Whether a business falls within the Act depends not simply on labels such as retail or food service, but on criteria including the supply of goods, management guidance, use of branding and collection of payments on joining.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also concern franchises across a wide range of sectors. Franchisors and franchisees are independent businesses, and their dealings are subject to the Act. Conduct that exploits a superior bargaining position to impose an unjust disadvantage may constitute an abuse of that position. A non-refundable clause is not automatically unlawful, however: the particular circumstances must be assessed.

Before signing, explain not just the amounts payable but also how settlement would work in realistic scenarios where the business fails to open. Even where statutory disclosure requirements do not apply, providing important financial terms in writing in advance helps prevent disputes.

Practical takeaway: Before invoicing the initial franchise fee, prepare a breakdown of what it pays for, evidence of delivery and a settlement schedule for cases where the business does not open. If staff give different explanations of a refund term, review it before you begin recruiting franchisees.