Franchise fees: build a clear model before expanding

When expanding your existing business through a franchise network, the fees need to work for two independent businesses. You must be able to fund your commitments without making the franchisee’s business unreasonably expensive to run. So do not start with a percentage simply because it seems common. Start with the rights you actually grant, the services you provide and what you need to be paid for.

1. Separate the initial fee from ongoing fees

First, list what the franchisee gains access to on joining and throughout the term of the agreement. The right to use the business concept and brand is one element. Induction, opening support and ongoing advice are others, each potentially requiring different levels of work.

An initial fee might, for example, cover entry into the franchise network and a clearly defined induction package. The ongoing fee might cover continued use of the concept and agreed support. These are possible contractual arrangements, not categories defined by law.

For each fee, describe:

• which right or service it covers,
• what is included and what costs extra,
• when the obligation to pay arises,
• whether payment is made in one instalment or spread over several.

Avoid wording such as “all support included” if you actually mean a set number of training sessions and advice during specified hours. Also state whether travel, accommodation and training for staff recruited later cost extra.

Use experience from your existing business to estimate the work involved. Distinguish between the cost of developing the concept and the cost of bringing an additional unit into the network. Initial fees should not become essential to covering a recurring shortfall in funding support for existing franchisees.

2. Choose a calculation model and define the fee base

A fixed ongoing fee provides a predictable amount but places a relatively heavy burden on a business with low sales. A turnover-based fee moves in line with sales, but not automatically with the franchisee’s margin. A combination is possible, but becomes harder to understand if it includes numerous thresholds and exceptions.

Test the model at several sales levels. Check both whether the franchisee can afford the fee and whether you can deliver the agreed support when fee income is low. A minimum fee needs particular scrutiny during the start-up period and where sales fluctuate seasonally.

If the fee is based on turnover, the agreement must define precisely what that means. Explicitly address:

• whether the calculation excludes VAT,
• how discounts, returns and credit notes are handled,
• when sales involving gift cards are counted,
• how orders placed through central channels are allocated to the unit,
• whether third-party intermediary fees affect the calculation base.

A practical example is a sale through a platform that deducts its commission before paying out the proceeds. Without a clear definition, one party might calculate the fee on the customer’s purchase amount and the other on the net payout. The agreement needs to eliminate that discrepancy.

Have someone with accounting expertise check that the definitions can be applied in the systems you intend to use. Then test a sample invoice that includes returns and discounts, rather than straightforward sales alone.

3. Make the full cost picture visible

A low franchise fee says little about the overall financial burden. Mandatory systems, shared marketing, recurring training and purchasing requirements can add substantial costs. Bring all mandatory payments together in a fee schedule, even where the recipient is an external supplier.

For each item, the schedule should identify the payee, the basis of calculation, when payment is due and what may change. Clearly distinguish mandatory costs from optional extras. If an amount is an estimate, make that clear and explain what the estimate is based on.

Also decide how additional services are commissioned. If the franchisee wants extra on-site support, both parties should know the price and scope before the work is carried out. This reduces the risk of confusion between routine advice and chargeable additional support.

Future fee changes need a clear contractual mechanism. For index-linked adjustments, for example, specify the index, base period, adjustment date and what happens if the index is discontinued. Avoid presenting the fee as stable if the agreement also allows considerable scope for increases.

4. Align the model with Swedish law and the agreement

Sweden has no comprehensive franchise-specific legislation, but the Act (2006:484) on Franchisors’ Duty to Disclose Information sets out pre-contractual requirements. The franchisor must provide clear, comprehensible written information well before the agreement is entered into. Among other things, this must cover payments to the franchisor and other financial terms, as well as goods or services that the franchisee is required to buy or hire.

The Act does not prescribe a particular level of franchise fee. Fee provisions must also be assessed under general contract law, including the Swedish Contracts Act. Have a lawyer review both the payment terms and the clauses governing changes before putting the model into use.

Check that the fee schedule, agreement and worked examples describe the same obligations. Specify the billing period, payment due date and how errors in the fee calculation base are corrected. A prospective franchisee should be able to understand their payment obligations without having to piece together verbal promises.

Practical conclusion: Do not finalise a fee until you can show what it covers, how it is calculated and when it is payable. Run sample calculations for both the franchise unit and the franchisor before inviting anyone to join the network.