Setting franchise fees for your existing business

Turning an existing business into a franchise network involves more than setting an attractive joining fee. Your fees need to fund the support you promise, be easy to understand and leave the franchisee enough financial breathing room. Franchising is a community of independent business owners: a sustainable business model supports both sides. This approach will help you design your fees before offering prospective franchisees specific terms.

1. Start with your services, not a percentage

Do not simply copy another franchise network’s rates. A similar percentage may cover a very different package of guidance, systems and purchasing benefits. Start by listing what you will actually provide as the franchisor.

Divide your activities into three groups:

• One-off support: selection, initial training, help with fitting out the premises and support around the opening.
• Ongoing support: site visits, commercial guidance, quality assurance and maintenance of central systems.
• Shared activities: campaigns, photography, customer research and the development of promotional materials.

For each activity, calculate the hours required, external costs and how often it will take place. Put a value on your own time too. Work you currently fit in around other tasks may require a paid employee as the network grows.

Next, distinguish between the costs of developing your franchise concept and those of bringing an individual franchisee on board. Making your first partner bear all the development costs could make joining unaffordable. Conversely, a low fee is no advantage if it means you cannot deliver the promised support.

For every paid service, describe exactly what the franchisee receives. ‘Support included’ is less useful than a description of availability, scheduled visits and the expertise on offer.

2. Choose a clear fee structure

A simple structure is easier to explain, check and administer. Give each fee a clear basis and avoid inadvertently charging twice for the same service.

The initial franchise fee can cover the right to use the franchise concept and one-off start-up support. Specify which services are included and which costs are charged separately. These might include travel and accommodation during training, or extra support if the opening is delayed.

The ongoing franchise fee can be a fixed sum, a percentage of turnover or a combination of the two. A fixed sum offers predictability but places a proportionately heavier burden on a low-turnover outlet. A turnover-based fee moves in line with sales but does not guarantee that it will cover the cost of support.

If a fee is based on turnover, the definition needs to be precise. Agree how you will treat VAT, returns, discounts, gift vouchers and online orders attributed to an outlet, among other things. Also establish when turnover must be reported and how adjustments will be processed.

A marketing contribution needs a separate explanation. Describe which shared activities it funds, who manages the budget and how franchisees will be informed about spending. Make clear which local marketing costs they must cover themselves in addition.

Also set out mandatory software costs, training charges, supplier contributions and any purchasing mark-ups. What matters to a prospective franchisee is the total financial burden, not just the most prominent fee.

3. Check that the fees work for both businesses

Assess your fees from two perspectives: that of the outlet and that of the central organisation. A fee may look attractive to you while leaving your partner with insufficient income as a business owner.

Prepare a financial model for the franchisee that includes all mandatory contributions alongside rent, staffing, purchasing, financing and other operating costs. Allow for replacement capital expenditure, working capital and appropriate remuneration for the business owner. Do not confuse profit on paper with available cash.

Then test what happens if:

• turnover builds more slowly than expected;
• staffing or premises costs are higher;
• more support is needed during the start-up phase;
• fewer outlets join than you had planned.

For your own business, calculate whether you can fund support even with a small franchise network. Initial franchise fees are one-off income; relying on them to fund ongoing support leaves you vulnerable. Keep development expenditure and recurring services separate in your budget.

Record the assumptions behind your figures. This will help you explain why a fee is appropriate without presenting a favourable scenario as a certainty.

4. Put transparency and fee changes on a sound legal footing

In the Netherlands, the Dutch Franchise Act (Wet franchise) has been in force since 1 January 2021 and forms part of Book 7 of the Dutch Civil Code. Among other things, it requires franchisors to provide information before the agreement is signed about fees, mark-ups, investments and other financial contributions, including their purpose.

The legally required information must be supplied at least four weeks before the franchise agreement is signed. During this standstill period, you may not require payments or investments connected with the proposed franchise agreement. Do not use a mandatory deposit to secure a prospective franchisee’s commitment in advance.

The agreement should specify how fees are calculated, when they fall due and what indexation applies. A general variation clause does not give you unlimited freedom. Certain changes to the franchise concept that have financial consequences may trigger the statutory right of consent, depending on the agreed thresholds. Have proposed changes legally reviewed in advance.

The law also requires consultation at least once a year. Use this to discuss services, costs and shared priorities. For mark-ups and other financial contributions collected for a specific purpose, there is also an annual duty to provide information on the relationship between the contributions received and the costs they cover.

Practical takeaway: only set your fees once you can explain what each one pays for, how it is calculated, the total financial burden on the outlet and the rules governing changes. Then have a financial adviser and a specialist franchise lawyer review your budget and agreement together.