How to Set Franchise Fees for Your New Zealand Business

Setting franchise fees is not simply a matter of copying another brand’s royalty rate. When franchising an existing New Zealand business, you need charges that fund the support you promise while leaving franchisees a commercially worthwhile business. A sustainable fee structure supports a healthy franchising community. Start with what you will deliver, then work out how to pay for it.

1. Separate establishment costs from ongoing support

Create two cost schedules before choosing any fees. The first should cover bringing an individual franchisee into the business: initial training, site assessment, launch assistance, account set-up and the time your team spends preparing that opening.

The second should cover recurring services, such as field visits, technical assistance, refresher training, quality reviews and system improvements. Include staff time at a realistic cost, even where you currently do the work yourself without drawing a separate salary for it.

Keep the cost of developing the franchise system visible but separate. Legal drafting, training programme development and recruitment infrastructure require funding before a network exists. Expecting your first franchisee’s entry fee to recover all that investment can make the opportunity unattractive.

For each cost, record:

• What service or activity creates it.
• Whether it occurs once or repeatedly.
• Whether it increases with each additional franchisee.
• Whether the franchisor or franchisee pays the supplier directly.

This exercise gives you a defensible starting point for fees and reveals how much capital you need before recruitment begins.

2. Choose a royalty basis that matches the business

A percentage-of-sales royalty moves with turnover, but turnover does not necessarily reflect profitability. A franchisee with high sales and expensive materials may have less money available than one with lower sales and better margins.

A fixed recurring fee makes budgeting simpler, but can place heavier pressure on a new or seasonal operation. A hybrid structure may address some of these differences, although minimum charges and multiple calculations can become difficult to explain and administer.

Compare possible structures using the actual economics of your existing business. Include a reasonable allowance for the franchisee’s work, occupancy costs, staffing, working capital, debt servicing and equipment replacement. Distinguish accounting profit from cash available to the owner.

Then test the franchisor’s position. Can recurring income fund the promised support if recruitment is slower than expected? A model that needs a constant flow of entry fees to cover routine support deserves reconsideration.

Do not choose a royalty simply because it looks familiar. Choose a basis that both parties can understand, calculate and sustain.

3. Make every additional charge visible

The royalty is only part of the franchisee’s financial commitment. List marketing contributions, software subscriptions, mandatory training, renewal charges, transfer fees and any required purchases from you or nominated suppliers.

Separate the initial franchise fee from the total investment needed to open. Fit-out, equipment, stock, professional advice and working capital should not disappear behind an attractive headline price.

For marketing contributions, decide what the money may fund, who controls expenditure and how franchisees will receive reports. Explain whether local advertising is an additional obligation. Avoid suggesting that each franchisee will receive advertising expenditure equal to their contribution unless that is genuinely the arrangement.

Where you receive supplier rebates or earn a margin on required purchases, explain the arrangement clearly. These receipts affect the overall commercial relationship, even if they are not labelled as fees.

Specify whether quoted amounts include or exclude GST, and have your accountant confirm the appropriate treatment. Consistent presentation reduces misunderstandings when candidates compare costs.

4. Turn the fee model into clear contractual terms

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or franchise registration requirement. That does not remove legal responsibilities when setting and describing charges.

The Fair Trading Act 1986 prohibits misleading or deceptive conduct and false or misleading representations. Fee descriptions and claims about what franchisees receive must therefore be accurate. Its unfair contract terms regime can also apply to qualifying standard-form small trade contracts. The Commerce Act 1986 is relevant to competition restrictions, including supply arrangements and resale price maintenance. General contract law also governs the parties’ obligations.

Membership of the Franchise Association of New Zealand is voluntary, but its codes bind members. Its disclosure requirements are association obligations, not a statutory regime applying to every franchisor.

Ask a New Zealand franchise lawyer to define the royalty calculation precisely. Address GST, refunds, discounts, online orders, reporting periods, payment dates and verification rights. Set out any fee-review mechanism clearly rather than relying on an unrestricted ability to change charges.

Have your accountant check that the agreement’s calculation produces the same result as your financial model.

Practical takeaway: Before recruiting, prepare one complete fee schedule, cost every promised service and test affordability for both parties. Only then turn the figures into contractual commitments.