How to Set Your Franchise Fees and Royalties: Keys to a Balanced Contract

Discover How to Set Your Franchise Fees and Royalties to Ensure a Balanced Contract and Showcase Your Expertise.

Within the framework of a franchise agreement, several types of royalties are payable by the franchisee. It is essential for the franchisor to set them consistently, both with the services provided and the market practices.

The Entry Fee: Valuing Access to Your Expertise

The entry fee is the amount paid by the franchisee upon signing the franchise agreement, in return for which they gain immediate access to the franchisor's know-how and can operate a business under an already recognized brand, thereby benefiting from a competitive advantage.

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

Amount of 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 support, transfer of know-how, etc.);
• The time spent supporting the franchisee;
• Market practices, particularly among competing networks.

The Brand Royalty: Compensating for Brand Use and Support

The brand royalty, also called "franchise fee", "royalty" or "operating fee", is paid throughout the duration of the contract. It compensates for:

• The right to use the franchisor's brand as a trade name;
• The ongoing support provided to the franchisee (animation, advice, continuous training, know-how updates...).

Structure of the Brand Royalty

This royalty can be structured in several ways:

• Percentage of turnover, possibly with a guaranteed minimum;
• Or a hybrid model combining these approaches.

Calculating the Brand Royalty

The calculation of this royalty assumes that the franchisee fulfills a reporting obligation, by regularly providing their results. These elements can be obtained automatically using a shared software between franchisor and franchisee.

The amount or royalty rate will depend on:

• The actual cost of support provided by the franchisor;
• The business models in the sector and competitive practices;
• The franchisor's strategy.

The Marketing Fee: Pooling the Network's Marketing Efforts

Also called "marketing royalty" or "contribution to the communication fund", this fee finances the communication actions undertaken for the entire network. It covers:

• The creation of campaigns (visuals, messages, strategy);
• The salaries of internal teams / agencies in charge of communication;
• And, if the budget allows, the broadcast of national campaigns across various channels (press, digital, television...).

Amount of the Marketing Fee

The amount is generally calculated as a percentage of the franchisee's turnover. The collected sum is paid to the franchisor, who manages it through a dedicated accounting system.

It should be noted that the franchisee must also allocate a local marketing budget around their point of sale. These actions can be implemented using a marketing kit provided by the franchisor and are considered essential for the franchisee's commercial success.

Conclusion

Royalties play a central role in the balance of the franchise agreement. However, this balance is not based solely on financial aspects. It is important to also analyze the other clauses of the contract.

Linkea Avocats, law firm specializing in franchising and franchisors