Design the franchisee's profit and loss before you set your fees
A royalty rate is not a pricing decision, it is a structural one. It determines whether your best operators stay motivated or quietly disengage.
New franchisors often set fees by looking at what comparable brands charge. It is an understandable shortcut and a poor one, because the number that matters is not the market average — it is what your model can carry while leaving the operator a return worth their risk.
We build the franchisee's profit and loss first. Revenue at a realistic ramp, not a best case. Labour at the rate a competent manager actually costs in the markets you are targeting. Rent, supply, marketing contribution, technology fees, debt service on the buildout. Then royalty last, as the residual test.
If a well-run unit cannot clear a meaningful owner's return after all of that, the system is not ready regardless of how attractive the brand looks. Squeezing the number tighter does not fix it; it moves the failure a year down the road, into renewals, disputes and units that go dark.
The reverse mistake exists too. Fees set too low leave the franchisor unable to fund the field support, training and marketing infrastructure that franchisees were promised. Under-resourced support is one of the most common causes of network resentment.
A defensible fee structure is one you can walk a candidate through line by line. If you cannot show a prospective franchisee the arithmetic of their own return, you should not be asking them to sign.