Set sustainable franchise fees for your business

When you want to turn your existing business into a franchise network, the fees need to work for both parties. They must fund the support you promise while leaving franchisees room to pay themselves, invest and weather setbacks. Start with costs and the financial performance of an individual unit, rather than a percentage borrowed from another franchise concept.

1. Separate start-up costs from ongoing support

Prepare two separate costings: one for bringing a new franchisee on board and another for supporting an established unit. This reduces the risk of relying on initial fees from new franchisees to cover shortfalls in ongoing operations.

Your start-up costing should include initial training, set-up support, systems induction and staff time before opening. Put a value on your own time too. As the founder, delivering training without drawing extra pay does not make that work cost-free or mean you can repeat it indefinitely.

The ongoing costing may include:

• operational support and regular training,
• quality monitoring and visits to franchisees,
• development of shared working practices and products or services,
• administration and shared systems that you pay for.

Also distinguish between shared costs and costs that rise with each new unit. A central support team may need to expand in stages. Model the costs for several network sizes, rather than just a future scenario in which all central costs are assumed to be spread across many units.

Document exactly what the initial franchise fee covers. Premises, fixtures and equipment, stock and working capital should be listed separately if they are not included. A franchisee’s total capital requirement is not the same as the fee they pay you.

2. Test the fee against the franchisee’s finances

Use actual results from your existing business as a starting point, but adjust for costs that an independent franchisee would need to bear. The founder’s unpaid overtime, unusually low rent or staff shared with another business can otherwise give a misleading picture.

Prepare a profit and loss forecast that includes market-rate remuneration for the work the owner does. Add a cash flow forecast showing when money comes in and when fees, wages, taxes and suppliers must be paid. An annual profit does not guarantee sufficient cash every month.

Then test at least three scenarios: expected sales, lower sales and a slower start-up. Examine what happens if staffing costs or purchase prices rise at the same time.

The key question is simple: Can the franchisee pay the fees, pay themselves for their work and still build a reasonable financial reserve? If the answer is yes only in the most optimistic scenario, the proposition needs reworking.

Use these scenarios to inform decisions, not as promises of financial performance to prospective franchisees. Make clear which assumptions are based on historical results and which are estimates.

3. Choose a model and define the calculation basis

A fixed fee offers predictability but places a relatively heavy burden on a unit with weak sales. A turnover-based fee moves in line with sales but does not automatically account for the franchisee’s margins. A combination may be possible, but adding more components does not necessarily make it better.

Choose your model according to how you deliver support and how the business makes money. If margins vary significantly across the concept’s products or services, examine how the fee model affects behaviour and profitability.

For a turnover-based fee, the agreement must clearly define the basis of calculation. Decide, for example:

• whether turnover is calculated excluding VAT,
• how returns, discounts and bad debts are treated,
• when gift vouchers and advance payments are included,
• how sales through third-party platforms are handled,
• which unit is credited with orders received centrally.

Also specify the reporting period, payment date and how errors are corrected. Test the model on real transactions before using it in agreements.

If you charge a separate marketing fee, its purpose, decision-making arrangements and reporting requirements should be clear. Explain whether franchisees must also fund local marketing. Transparency over shared funds helps build trust across the franchise network.

4. Align your costings, agreement and fee disclosures

Sweden has specific legislation: the Act (2006:484) on Franchisors’ Duty to Disclose Information. It requires franchisors to provide clear, comprehensible written information well before the franchise agreement is entered into. This must include, among other things, payments to the franchisor and other financial terms. Your fee model therefore needs to be clear beyond your internal calculations.

The Act does not determine the level of fees you should charge. The Swedish Contracts Act and, depending on how the terms are structured, competition rules are also relevant. Have a lawyer review the fee provisions alongside the rest of the agreement.

Specify which services are included, which additional costs are compulsory and how future changes may be made. If fees are to be index-linked, state the index, base period, adjustment date and calculation method. Avoid vague wording that allows fees to be changed ‘as required’.

Practical next step: Bring the fees, calculation bases, services provided in return and payment dates together in a single fee schedule. Check it against both parties’ budgets and the draft agreement before you start recruiting franchisees.