How to Set Franchise Fees and Royalties in Mexico

Franchising an existing business means turning the owner’s experience into a financially sustainable proposition for others. The initial fee should not be a figure chosen simply by comparison, nor should royalties be a percentage that seems standard. Every charge needs a purpose, a verifiable basis and clear terms. This is how you build a franchise network that can grow without relying on fees from new openings to support existing franchisees.

1. Separate onboarding costs from ongoing support costs

Before setting prices, prepare two budgets: one for onboarding each franchisee and another for supporting them once they are operating. Combining the two can result in an attractive initial fee that later proves insufficient to deliver what you have promised.

Where applicable, identify the following in your onboarding budget:

• Premises assessment and team travel.
• Initial training and learning materials.
• Support during set-up and opening.
• Setting up tools and access permissions.
• Administrative time and advisory services related to that onboarding.

Distinguish these costs from the general expense of developing the franchise model, such as designing the brand identity or establishing the franchise’s legal structure. You can plan to recover those costs gradually, but charging them all to the first opening could make it unviable.

Your recurring budget should include technical assistance, visits, tool updates, oversight and support staff. Account for the founder’s time too: not charging for it today does not mean it is free or can be scaled up indefinitely.

Expected outcome: a record for each service identifying who is responsible, its frequency, its estimated cost and the charge that will fund it. The initial fee and royalties do not have to match those costs exactly, but they do need a defensible economic rationale.

2. Test royalties against the franchisee’s finances

First, calculate how an outlet would perform after paying all charges. Use verifiable data from the existing business, adjusted for differences in rent, wages, logistics and local demand. Do not present your own outlet’s performance as a guarantee of future results.

Prepare low, expected and high sales scenarios. In each, deduct stock or supplies, payroll, premises costs, utilities, platform commissions, advertising and franchise payments. Separate operating profit from the cash available after tax, debt payments and reinvestment.

You can assess three structures:

• Sales-based royalty: moves in line with revenue, but requires a clearly defined and verifiable calculation basis.
• Fixed recurring fee: makes budgeting easier, although it becomes a heavier burden when sales fall.
• Hybrid structure: combines elements of both; particular care is needed to avoid stacking up charges that become difficult to sustain.

If you charge royalties on sales, clarify how you will treat Mexican value added tax (IVA), returns, discounts, cancellations and orders placed through platforms. Do not allow ‘net sales’ to mean something different to each party.

Then examine the franchisor’s finances: do royalties from operating outlets cover the support you have committed to provide? If you need new entry fees to support those outlets, review the structure before offering more franchises.

3. Make every payment and its terms transparent

Create a single fee schedule for use in budgets, presentations and contractual documents. For each item, specify who collects the payment, what the franchisee receives, how it is calculated, when it is due, which taxes apply and under what conditions it may change.

As well as the initial fee and royalties, review charges for advertising, software, additional training, extra visits, renewals and transfers. Distinguish payments to the franchisor from payments to suppliers: both affect the investment required, even if they are not your revenue.

If there will be an advertising contribution, define its purpose, how it will be managed and how spending will be reported. Explain whether it covers network-wide campaigns, the production of materials or local activities. Do not suggest that it guarantees sales or confuse it with a royalty the franchisor can spend at its discretion.

Also establish what happens if openings are delayed, agreements are cancelled or services go unused. Advance payments, refunds and adjustments need explicit rules rather than verbal promises. Any mechanism for adjusting charges must be understandable and legally reviewed.

4. Align the financial model with Mexican law

Mexico specifically regulates franchises through its Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial). Article 245 requires prospective franchisees to receive information about the state of the business at least thirty days before entering into the agreement. This should not be confused with a twenty-day period.

Article 246 requires a written agreement. Its minimum content includes policies, procedures and timeframes relating to refunds, financing and other payments or consideration, as well as criteria and methods for determining profit margins or commissions. This does not mean you must guarantee profitability.

Seek legal and tax advice to ensure that charges are consistent with the pre-contractual information and the agreement. Do not attribute disclosure obligations to a supposed NOM-010 franchise standard: their basis lies in industrial property legislation and the applicable regulations.

Putting this into practice: before recruiting prospective franchisees, complete the fee schedule and test both budgets. Proceed only when you can explain what each charge funds and how the business performs after paying it.