Setting US Franchise Fees for an Existing Business

Setting franchise fees is not simply a matter of copying another brand’s royalty rate. When franchising an existing US business, you need a charging structure that funds your obligations while leaving franchisees a credible opportunity to build sustainable businesses. That balance supports a healthy franchising community. Start with the services you will deliver, then test how each proposed charge affects both sides of the relationship.

1. Separate launch costs from continuing support

Create two cost schedules before choosing any fees. The first should capture the work involved in bringing one new franchisee into the network. The second should capture the recurring cost of supporting an operating location.

Launch costs might include recruitment, site assessment, initial training, opening assistance and travel. Continuing costs might include operational coaching, quality reviews, supplier management, technology administration and updates to training materials.

For each activity, record:

• Who delivers it and how much staff time it requires.
• Whether the cost arises per franchisee, per location or across the whole network.
• When cash leaves your business and when the related fee arrives.
• Whether the franchisee pays you or pays a supplier directly.

Do not assume that your existing management team can absorb franchise support indefinitely. Include a realistic allowance for additional capacity as the network grows.

The initial franchise fee does not have to equal onboarding costs exactly. However, understand what remains after recruitment and launch expenses. A model that relies on continually selling new franchises to support existing franchisees carries an obvious financial vulnerability.

2. Test the royalty against franchisee economics

A percentage royalty moves with the sales measure defined in the agreement. A fixed royalty offers more predictable receipts but can place greater pressure on a slower location. Minimum royalties combine features of both and require particularly careful testing during the opening period.

There is no universally correct structure. Model your proposed charges against realistic operating scenarios rather than choosing a rate because it appears common elsewhere.

Build a franchisee profit-and-loss forecast that includes rent, staffing, supplies, insurance, maintenance, technology, local marketing and every proposed franchise charge. Allow for a commercial wage for the owner’s work: a business that only appears profitable because its owner works unpaid needs closer examination.

Test at least three situations: a slower opening, a mature location trading as expected, and a downturn with rising costs. Separately assess debt repayments, tax and working-capital needs, which can strain cash even when the accounts show a profit.

Define the royalty base precisely. Address refunds, discounts, sales taxes, gift cards, online transactions and third-party delivery arrangements where relevant. For example, decide how delivery-platform commissions affect the calculation rather than leaving franchisees to interpret “gross sales” themselves.

Keep internal modelling separate from recruitment claims. Under the FTC Franchise Rule, financial performance representations generally must comply with Item 19 requirements; an internal spreadsheet is not permission to promise earnings to candidates.

3. Make additional charges transparent

Royalties are only part of the financial relationship. List technology charges, marketing contributions, renewal fees, transfer fees, additional training charges and any other amounts you expect franchisees to pay.

For each charge, prepare a plain-English explanation covering its purpose, calculation, payment date and circumstances in which it can change. Identify who receives the money and whether you or an affiliate benefits from required purchases.

Treat marketing contributions with particular care. Decide whether they fund national campaigns, regional activity, creative production or administration. Explain any separate local advertising obligation and avoid implying that each location will receive advertising expenditure equal to its contribution.

Also decide how you will report on fund activity. Clear reporting and consistent administration help maintain trust within the franchising community.

Where costs can increase, establish a workable contractual mechanism rather than relying on an informal expectation that franchisees will accept new charges. Ask your lawyer to review discretion, caps, notice provisions and any state-law restrictions.

4. Align the fees with US disclosure and contracts

The Federal Trade Commission’s Franchise Rule, 16 CFR Part 436, governs federal pre-sale franchise disclosure. In the Franchise Disclosure Document, Item 5 addresses initial fees, Item 6 other fees, and Item 7 the estimated initial investment. Required purchases and supplier benefits may also require disclosure under Item 8; advertising arrangements are addressed in Item 11.

Have US franchise counsel reconcile these disclosures with your agreement, financial model and recruitment materials. The payment triggers, refund terms, calculation methods and increase provisions should agree throughout.

Generally, the prospective franchisee must receive the FDD at least 14 calendar days before signing a binding agreement or paying the franchisor or an affiliate in connection with the proposed sale. The FTC does not register or approve FDDs. Some states impose registration, filing or additional disclosure requirements, and state relationship laws may affect contractual rights. Obtain advice for the states involved before offering franchises.

Practical takeaway: Build one complete fee schedule, test its effect on both businesses, and have franchise counsel check every charge before recruitment begins.