Franchise fees: how to set them in an established business

An established business knows the costs of running its own outlet, but not necessarily those of supporting independent partners. Before launching a franchise, you therefore need to calculate not just the price of access to the brand, but also head office’s long-term commitments. Well-designed fees help build a stable franchise network: they fund meaningful support, are easy to understand and leave franchisees with a financially viable business.

1. Start with costs and the scope of support

Do not simply copy competitors’ rates. A similar fee may cover a completely different range of services, and an attractive-looking fee schedule is no proof that the model is profitable. First, calculate the cost of supporting a franchisee, separating outlet launch costs from those of the ongoing relationship.

Launch costs should include training, the onboarding team’s time, help with choosing equipment, system configuration and support during opening. Include the owner’s time too, even if they do not currently pay themselves separately for these tasks.

Ongoing costs should cover franchisee support, outlet visits, maintaining tools, updating materials and resolving operational problems. Divide expenditure into:

• fixed costs, incurred regardless of the number of franchisees;
• per-outlet costs, which rise as the network grows;
• step costs, which arise when the existing team reaches capacity.

Hiring another franchise support manager is an example of a step cost. A model that works only because the owner answers every call for free does not reflect the full cost of support.

2. Separate initial, ongoing and marketing fees

The initial fee should have a clearly explained basis: access to specified rights, the transfer of know-how and an agreed onboarding package. State which services it covers and what the franchisee will pay for separately. Do not present it as the full cost of opening if it excludes equipment, initial stock or working capital.

The ongoing fee funds the continuing relationship and remunerates the franchisor. It may be a fixed amount, turnover-based or a combination of the two. A fixed amount makes head office income easier to forecast, but places a greater burden on the franchisee in a weak month. A percentage of turnover tracks sales, but does not automatically account for differences in margins and local costs.

If you introduce a minimum fee, check its effect on the outlet during the start-up period and seasonal sales downturns. An arrangement that protects head office may leave the franchisee short of cash.

Describe the marketing fee separately. Set out how the funds will be used, how expenditure will be planned and what reporting will be provided. Explain whether it also covers head office’s management of campaigns and whether the franchisee must fund local advertising separately. Do not promise that all contributions will go towards media buying if some of the money pays for producing marketing materials.

3. Define the calculation basis clearly

The phrase ‘percentage of turnover’ is too vague. The agreement should specify whether the fee is calculated on sales excluding VAT, when a transaction must be included and how adjustments are handled. Tailor the definition to the way sales actually take place, rather than copying it from someone else’s template.

In particular, decide:

• how discounts, returns and cancelled orders are treated;
• whether sales platform commissions reduce the amount on which the fee is calculated;
• which outlet receives credit for online orders;
• when gift vouchers and advance payments are accounted for;
• how sales fulfilled jointly by several outlets are treated.

Prepare a sample monthly calculation that includes a standard sale, a return and an order placed through an intermediary. It should produce the same result for the owner, the accounts team and a prospective franchisee.

Also specify the data source, reporting deadline, invoicing rules and procedure for resolving discrepancies. Head office’s access to the sales system should be proportionate to its fee calculation and reconciliation needs. It does not automatically confer a right to unrestricted access to customers’ personal data.

4. Test the fees in two profit and loss forecasts

Prepare separate profit and loss forecasts for head office and the franchisee. In the latter, include all mandatory costs: fees, software licences, local advertising, purchases required under the agreement and financing costs. Do not assess the offer solely on the basis of a single percentage rate.

Test a base case, a slower start-up and a fall in sales combined with rising costs. Include remuneration for the franchisee’s work. A surplus generated through their unpaid labour is not the same as a return on investment.

For head office, test a scenario in which fewer new outlets open than expected. Ongoing support should not depend solely on new initial fees. If there is not enough money to support existing franchisees without those fees, change the scope of services, costs or fee structure before starting recruitment.

5. Set out the terms in an agreement that complies with Polish law

Poland has no separate, comprehensive statutory framework for franchising. A franchise agreement is an ‘unnamed contract’ — a type of contract not specifically defined in legislation — based on the principle of freedom of contract under Article 353¹ of the Polish Civil Code. That freedom is limited, among other things, by legislation, the nature of the legal relationship and the principles of social coexistence. Competition, industrial property and tax rules also apply.

There is no specific statutory franchise register, nor a generally applicable statutory deadline, unique to franchising, for providing a disclosure document. Proposals to introduce such obligations should not be presented as current law. Codes of ethics are no substitute for legislation.

The agreement should specify payment deadlines, VAT treatment, any indexation, how fees are handled during a suspension of trading and the consequences of ending the relationship. Any mechanism for changing fees should have clear grounds, rather than giving one party unlimited discretion. Have a lawyer review the wording and a tax adviser check the tax and accounting treatment.

Practical takeaway: before accepting the first fee, prepare a schedule of services, a sample fee calculation and separate profitability forecasts for head office and the franchisee. Only when these are consistent can you assess whether the fees support a lasting relationship.