Adjusting Franchise Fees to Propel Your Brand into the Future

Franchising is a large part of the restaurant economy, and fast food service makes up a sizable share of it. We are past the uncertainties of the pandemic, but inflation is setting in, and that changes the math for every franchisor.

How is your restaurant franchise doing today? If you are not reaching your sales and customer experience goals, you may start looking at the balance sheet and wondering whether your franchisees could carry more of the load. Charging the right fees can make a real difference to brand revenue, as long as the franchisee is ready to pay and the fee benefits the brand too. From initial setup costs to technology charges, there are four types of fees a franchisor can levy on a franchisee.

For each fee type, this guide covers how to optimize what you earn from it to drive growth. But first, here are two ways to assess whether a franchisee will work out, because only a franchisee who can grow will let you grow with them.

Liquidity: how much in fluid assets does your franchisee have? This matters because it helps the outlet ride out any uncertainty during the first year of operation.

Net worth: is the franchisee stable enough to take on the commitment? Net worth is a measure of long-term staying power, and that staying power directly benefits your brand.

Once the franchisee is eligible to operate your restaurant franchise outlet, you can turn to the fees and how best to use them to grow the business.

Franchisee registration fees

Before someone becomes a restaurant franchisee, they pay the initial fee for registration and setting up the franchise. Franchisors sometimes set this fee high and sometimes relatively low. A lower initial cost appeals to franchisees who cannot afford a heavy setup bill on top of other planned expenses. When the revenue a location generates is sizable compared to the cost incurred, franchisees are willing to pay more.

And they pay for good reason. Restaurants that set a higher initial cost typically offer more value back to the franchisee, which shows up as higher revenue per location. One more point to note: if you use a broker to acquire franchisees, the broker commission has to be built into the initial franchise fee.

Royalty fees

A royalty fee is often charged on top of the initial setup cost. It is either a percentage of the revenue a franchisee generates or a fixed amount set by the franchisor, paid monthly or quarterly under the franchise disclosure document the two parties agree to. The goal is not to keep raising the royalty fee, but to reinvest the dollars you collect into growth. Many businesses collect royalties and then spend them poorly. Set the royalty money aside and accumulate it over time in a reserve you can draw on for a large one-time investment when the business needs it.

Marketing fees

Charging franchisees a national or local marketing fee to promote the restaurant brand is a smart move. Marketing a product well on a limited budget is hard, and if a new competitor is gaining ground, your franchise will need all the support it can get. Most brands plan for this and charge a national advertising fee, usually as a percentage of sales, with a few charging a fixed monthly amount.

Many brands argue the marketing fees they charge are not enough to gain a foothold or hold their position. At the same time, the marketing fee that drives popularity for your brand should not overcharge the franchisee. Aim for a middle ground that serves your marketing needs and stays fair to the franchisee.

Technology fees

Some franchisors charge a technology fee that covers the software and hardware licenses needed to run the location. You can choose to waive these fees and skip certain technology, but that is usually a mistake, because franchisees tend to value the tools.

If you offer technology that makes a real difference to sales and brand recall, you can charge a fair sum for it. A good example is a smart point-of-sale system that tracks customer orders over time and makes personalized recommendations. According to Forbes, about 72% of customers respond only to personalized messaging. That can drive higher order values and speed up checkout. To bring technology like this into your franchise you have to levy a technology fee, so explain the benefits clearly enough that you do not scare franchisees off.

Technology has another advantage: in most cases the progress it delivers is measurable. You will have KPIs that show the impact of the technology on revenue, and you can use those numbers to win over franchisees who are still on the fence.

Closing words

Charging franchisees fees to sustain the brand is fine, as long as the brand is helping those franchisees succeed. When a franchisor leans too heavily on a few franchisees, or a franchisee leans too heavily on the franchisor, the business is not in a healthy place. Startup costs for a franchisee can run high, so you may need to compromise on certain fees if that works better for both sides.

Reducing royalty fees may not set you back much, but cutting marketing or technology fees can put your brand on the back foot and even help the competition. Make the right trade-offs. We hope this guide helped you understand the fees a restaurant franchise can charge and how to set each one to grow.