Setting Fees Before Franchising Your Business

Simply copying another brand’s fees is not enough when you decide to franchise your business. Initial fees and royalties need a clear basis: what are you providing, how much does it cost to deliver, and can the outlet afford it? A sound franchise fee structure helps both parties remain viable, rather than merely securing a signed agreement.

1. Separate opening costs from ongoing support

Start by listing the work needed to prepare a new outlet. This may include assessing the applicant, pre-opening preparations, initial training, and visits from your team during the first few days of operation. Record staff time, travel, materials, and other direct costs.

Then draw up a separate list of ongoing activities: outlet visits, troubleshooting, maintaining the systems in use, and regular operational guidance. Do not automatically count the same cost towards both fees.

For each activity, identify:

• Scope: What exactly will the franchisee receive?
• Frequency: Is it a one-off, monthly, or provided as needed?
• Cost basis: Is the cost driven by staff time, the number of outlets, or actual usage?
• Who pays: You, the franchisee, or both under a clearly defined split?

Use actual records from your existing business where available. If a figure is still an estimate, label it as such and explain the assumptions. An untested figure should not be presented as an established cost.

2. Give each fee a clear purpose

The initial franchise fee may cover entry into the franchise system, the rights granted, and services provided before opening. It does not automatically represent the total investment needed to set up the outlet. If equipment, opening stock, rental deposits, or working capital are separate, state this explicitly.

Direct preparation costs, a reasonable share of overheads, and your chosen profit margin can provide a starting point for calculating the fee. This is a guide to decision-making, not a formula prescribed by law. You also need to consider the value of the right to use the brand and system, without promising guaranteed earnings.

For royalties, assess the impact of a fixed fee compared with a percentage of sales. A fixed fee is easier to forecast but can become burdensome when sales are weak. A percentage-based royalty requires a precise definition of the sales figure used in the calculation.

Clarify how product returns, cancelled transactions, discounts, taxes, and delivery platform charges will be treated. If there is a minimum royalty, include it in your affordability assessment. Ask a tax adviser to review the correct tax treatment of each fee.

3. Test whether the fees work for both parties

Prepare separate projections for the franchisor and franchisee. On your side, compare expected recurring fee income with the cost of ongoing support. On the franchisee’s side, look at what remains after product costs, wages, rent, other operating expenses, and all franchise fees.

Test low, typical, and high sales scenarios. Include the higher cost of visiting distant outlets and periods when many franchisees need help at the same time. These are internal assessments, not promises of future results.

Watch for one warning sign: do you need to keep selling new franchises to fund the support promised to existing franchisees? If so, review your fees, service scope, or delivery methods. Do not conceal the shortfall through additional charges that were not explained before signing.

4. Document the fees in line with applicable rules

The Philippines does not have a single comprehensive law covering every aspect of franchising. However, Executive Order No. 169, series of 2022, sets out specific rules to protect micro, small and medium-sized enterprises that take on franchises.

For agreements covered by the order, the minimum requirements include full disclosure of fees before signing, including initial and recurring fees. There is also an obligation to register the agreement with the Department of Trade and Industry (DTI). The order does not set the commercial prices you should charge; you must develop a reasonable basis for them.

The Civil Code also applies to contractual obligations, while Republic Act No. 8293 applies to rights in the brand and related know-how made available for use. Have a lawyer review the fee schedule, payment deadlines, refund conditions, and any mechanism for changing the fees.

Practical takeaway: Before setting prices, draw up a table linking each fee to the service provided in return, its actual cost, and its impact on the outlet. If those four elements are not clear, do not start charging yet.