Singapore Franchising: Set Sustainable Franchise Fees

When franchising an existing Singapore business, copying another brand’s fees is a weak starting point. Your charges must reflect what you provide, what it costs to provide it and what an independently operated outlet can afford. A sustainable fee structure supports a healthy franchising community without making either party dependent on unrealistic sales or a constant stream of new recruits.

1. Separate initial costs from continuing costs

Start with two cost schedules: one for bringing a franchisee into the business and another for supporting that franchisee throughout the agreement.

The initial schedule might include recruitment administration, initial training, opening assistance and the work needed to establish access to your systems. Distinguish costs incurred for each new franchisee from the original investment in developing your franchise model. Recovering development expenditure may be a commercial objective, but it should not disguise the actual cost of onboarding.

The continuing schedule should capture recurring activities such as field visits, refresher training, technical assistance and system maintenance. Include staff time, travel and external service costs rather than treating the founder’s time as free.

Then assign each charge a purpose:

• Initial franchise fee: payment for the initial grant of rights and the agreed onboarding package.
• Royalty: recurring payment for continuing rights and the support included in the arrangement.
• Separate service charges: clearly identified payments for services outside that package.

Avoid charging twice for the same service. If opening assistance is included in the initial fee, explain which additional visits, if any, attract a separate charge.

2. Test the fee model on both sides

Use your pilot outlet’s actual results to model the proposed charges, even if the company-owned pilot does not pay them in practice. Add realistic costs for an independent operator, including paid management where the founder currently fills that role.

Compare a percentage royalty, a fixed recurring fee and any proposed combination. A percentage moves with the agreed sales base; a fixed fee remains payable when sales fall. Neither is automatically fairer. Their effects depend on margins, seasonality and the support you promise.

Test quieter trading periods, an extended opening ramp-up and higher operating costs. Ask whether the franchisee can meet ordinary expenses and receive a reasonable return after all franchise-related payments.

Run the matching calculation for the franchisor. Can recurring income fund continuing support without relying on initial fees from future recruits? Model the early network as well as a larger one: support costs rarely grow in perfectly even steps.

If the numbers do not work, change the support model, operating economics or proposed fees before offering the franchise. Do not solve a structural problem with optimistic sales assumptions.

3. Define precisely what attracts a royalty

A royalty percentage is incomplete without a definition of the amount to which it applies. “Gross sales” can create disagreement unless the agreement explains its components.

Work through the transactions your business actually handles:

• Is GST excluded from the royalty base?
• How are refunds, discounts and cancelled orders treated?
• Are delivery-platform sales counted before or after platform commission?
• When are gift vouchers counted, and how is double counting avoided?
• How are sales collected centrally but fulfilled by an outlet allocated?

There is no single commercial answer suitable for every franchise. The important point is to make the chosen treatment explicit and consistent with your financial model.

Prepare worked examples using ordinary transactions from the pilot. Have your accountant and franchise lawyer check that the examples produce the same result as the contractual wording. State when royalties begin, the calculation period and the payment deadline.

4. Document the charges under Singapore law

Singapore has no franchise-specific statute, franchise registration system or mandatory statutory pre-sale disclosure regime specifically for franchises. Fees are therefore principally a matter of contract, subject to applicable general law. General contract law and the Misrepresentation Act govern relevant contractual and pre-contractual issues; tax legislation also affects how payments are invoiced and treated.

The Franchising and Licensing Association Singapore’s Code of Ethics applies to its members, rather than operating as a compulsory national franchise law. Membership is voluntary.

Provide prospective franchisees with a clear schedule of initial, recurring and conditional charges before signing. Identify what each includes, whether applicable GST is additional and how any future adjustment works. Avoid an unexplained right to introduce new charges at will.

Ask a Singapore tax adviser to check the treatment of each payment. Payments to a non-resident franchisor may raise withholding-tax questions depending on their nature and applicable treaty relief. Any obligation to increase a payment to compensate for tax withheld should be expressly addressed, not left as a surprise.

Practical takeaway: Before recruiting, complete a cost schedule, a two-sided financial model and a worked royalty calculation. Offer the franchise only when all three support the same clearly documented fee structure.