Setting Franchise Fees and Royalties: Key Principles

Entry fees, royalties, and communication fees: how can they be structured to ensure both balance and performance in a franchise network? Explore the essential keys to getting it right.

Setting Franchise Fees and Royalties: Key Principles

Under a franchise agreement, several types of fees are payable by the franchisee. It is essential for the franchisor to set them in a consistent manner, aligned both with the services provided and market practices.

The entry fee: valuing access to your know-how

The entry fee corresponds to the amount paid by the franchisee at the signing of the franchise agreement, in exchange for which they gain immediate access to the franchisor’s know-how and the right to operate a business under an already established brand, thereby benefiting from a competitive advantage.

The entry fee may include initial training for the franchisee, although this is not systematic. Some franchisors choose to invoice this training separately, relying on a legal structure dedicated to professional training.

The entry fee

The amount of the entry fee is not regulated under French law. The franchisor is therefore free to set it, taking into account:

  • The services provided (training, opening assistance, know-how transfer, etc.);
  • The time dedicated to supporting the franchisee;
  • Market practices, particularly within competing networks.

The brand royalty: paying for the use of the brand and ongoing support

The brand royalty, also referred to as a “franchise royalty,” “royalty fee,” or “operating fee,” is paid throughout the entire duration of the agreement.

It remunerates:

  • The right to use the franchisor’s brand as a store sign;
  • Ongoing support provided to the franchisee (network animation, advice, continuous training, know-how updates, etc.).

The brand royalty

This royalty can be structured in several ways:

  • A percentage of turnover, possibly with a minimum guaranteed amount;
  • A fixed fee paid monthly, quarterly, or annually;
  • Or a mixed model combining both approaches.

The calculation of this royalty requires the franchisee to comply with a reporting obligation, regularly providing performance data.

These figures can be collected automatically through shared software used by both franchisor and franchisee.

The level or rate of the royalty depends on:

  • The actual cost of the support provided by the franchisor;
  • Industry business models and competitive practices;
  • The franchisor’s overall strategy.

The communication fee: pooling the network’s marketing efforts

Also known as a “marketing fee” or “communication fund contribution,” this fee finances communication actions carried out for the entire network.

It covers:

  • The creation of campaigns (visuals, messaging, strategy);
  • The salaries of internal teams or agencies responsible for communication;
  • And, if the budget allows, the distribution of national campaigns across various channels (press, digital, television, etc.).

The communication fee

The amount is generally calculated as a percentage of the franchisee’s turnover.

The collected funds are paid to the franchisor, who manages them through dedicated accounting.

It should be noted that the franchisee must also allocate their own local marketing budget around their outlet. These actions can be implemented using a marketing kit provided by the franchisor and are considered essential to the franchisee’s commercial success.

Conclusion

Fees play a central role in the balance of a franchise agreement. However, this balance is not based solely on financial aspects. Other contractual clauses of the franchise agreement must also be carefully analyzed.

Article written by LINKEA AVOCATS, a law firm specialized in franchising and franchisors.