Setting an ongoing franchise fee before you launch

Your existing business may be profitable, yet the same business model could barely break even for a franchisee paying a monthly fee. So do not set that fee simply by copying another franchise’s percentage. In a healthy franchise network, both individual outlets and the central organisation need to be financially viable. This guide helps you test your ongoing franchise fee before entering into your first franchise agreement.

1. Calculate what you need to provide on an ongoing basis

The ongoing franchise fee, often called a royalty, typically covers the right to use the franchise system and recurring services. Start with a concrete list of activities and costs, rather than the rate you would like to charge.

Consider business guidance, development and upkeep of the franchise system, central systems and support with operational queries. For each item, record the resources required, who will provide them and how costs will change as more outlets join.

Divide your calculation into three categories:

• Fixed central costs: costs you incur even with only a small number of franchisees.
• Costs per outlet: for example, a user licence or scheduled hours of business support.
• Costs that rise in steps: for example, additional staff once your existing team runs out of capacity.

Put a value on your own time too. If you initially provide support for free, the fee will look more profitable than it really is. Also allow a realistic margin for business continuity and development of the franchise system.

Avoid double counting. Initial training paid for through the joining fee should not quietly be included again in the costs covered by the monthly fee. Also make clear which activities fall under a separate marketing contribution and which are covered by the general franchise fee.

2. Choose a calculation basis both parties understand

A fixed monthly amount offers predictability, but places a relatively heavy burden on an outlet with low turnover. A percentage of turnover moves in line with sales, but not necessarily with profit. A combination may be appropriate, provided the calculation remains easy to understand.

Test each option against the same operating budget. Look not only at the fee you receive, but also at what the franchisee has left to cover financing costs, replacement investment, their own remuneration and unexpected setbacks.

For a turnover-based fee, you need to define precisely what counts as turnover. Discuss questions such as:

• Is the calculation based on turnover excluding VAT?
• How are returns, discounts and refunds handled?
• When are gift vouchers or advance payments included?
• How are sales through platforms and the associated commissions treated?
• Which sales are attributed to the outlet when several sales channels work together?

That last point deserves particular attention if an existing business passes centrally received orders on to local operators. An unclear calculation basis can quickly lead to different results.

Record the outcome in a short calculation schedule attached to the contract. Ask someone who was not involved in designing it to use it to calculate the fee for a sample month. If the results differ, the terms are not yet clear enough.

3. Test the fee against growth and difficult trading conditions

Prepare separate budgets for the franchisor and the franchisee. Draw on experience from your own business, but adjust for differences. A franchisee may, for example, face different rental costs or outsource work you do yourself.

Then model several situations: a slower start, normal trading and disappointing turnover. Present these as financial scenarios, not guaranteed results.

On the franchisor’s side, check how much support you can actually afford to provide. A fee that only works once there are many outlets means you will need funding for the period before you reach that scale. It is not a reason to make the first franchisee automatically bear all the start-up costs.

On the franchisee’s side, check whether higher turnover also produces a sufficient increase in profit. For activities with high direct costs, a turnover-based percentage can be a significant burden, even when sales are growing.

Planning to offer a temporarily reduced introductory fee? Set out its duration, conditions and the eventual standard rate in advance. Run the outlet’s figures without the discount too. Otherwise, you are merely postponing a structural problem.

4. Document the fee in line with the Dutch Franchise Act

The Netherlands has specific franchise rules: the Dutch Franchise Act (Wet franchise), incorporated into Title 16 of Book 7 of the Dutch Civil Code since 1 January 2021. Before signing, prospective franchisees must receive information about, among other things, the fees, mark-ups and financial contributions you require.

Provide not just the percentage or monthly amount, but also the calculation basis, payment dates, any minimum fee and the agreed indexation arrangements. The draft contract and legally required information must be supplied at least four weeks before the franchise agreement is concluded. During that statutory period, you must not induce the candidate to make payments or investments.

A general clause allowing you to change fees at your own discretion is not a safe solution. Have increases and adjustment mechanisms reviewed by a legal adviser. Certain changes to the franchise system with financial consequences may also trigger franchisees’ statutory right of consent; a contractual power to make changes does not simply override that right.

Practical conclusion: only settle on a fee once you can explain what it funds, how it is calculated and why it allows both businesses to remain viable. Test those three points before presenting the fee to prospective franchisees.