How to compare franchise fee models by cash, sales base and VAT

What to take away

Compare fee models as cash paid per month and across the whole contract period, never as headline percentages.
Add initial fees, fit-out, mandatory purchases and exit charges to that same contract-period view.
Run every model twicenet of VAT and gross cash. Input tax recovery can change the ranking.
A flat monthly fee stays affordable when trade falls. A sales-linked fee costs least when trade is strong.
Take rates and sales definitions from the franchisor's current written disclosure, with the date it was issued.

Five models on one sales base

Compare each proposal as cash payable per month over an identical contract period, on one documented sales scenario. Keep three columns: net cost, VAT and gross cash. HMRC's franchising guidance sets out that franchise arrangements can involve initial and continuing fees, with continuing amounts calculated in different ways.

Fee mechanic

McDonald's UK: sales-linked service fee plus rent
Subway UK: weekly royalty plus advertising fund
Domino's Pizza UK: sales royalty plus supply purchases
Costa Coffee: turnover-based fee
Anytime Fitness UK: flat monthly fee plus ad fund

What to pin down first

McDonald's UK: service fee rate, rent method, review date, VAT on each
Subway UK: royalty rate, ad fund rate, exact sales definition
Domino's Pizza UK: royalty rate, supply prices, sales definition
Costa Coffee: fee rate, whether turnover includes VAT
Anytime Fitness UK: fixed fee amount, ad fund rate, contract term

The sales definition does most of the work here. Check whether refunds, discounts, delivery-platform sales and bad debts sit inside it. If the agreement is silent, record the question instead of choosing the reading that suits you.

The fee clause sits among others worth separate reading, including the six contracts around a franchise purchase that carry territory and exit terms.

Worked cash on a £10,000 sales base

The table uses illustrative rates so the arithmetic can be checked. Replace them with each franchisor's current published rate and the date it was issued. Figures are cash on £10,000 net monthly sales over 12 months.

Fee mechanic	Illustrative rate	Monthly net	12 months net	12 months gross at 20% VAT
Sales-linked service fee	4% of net sales	£400	£4,800	£5,760
Royalty plus ad fund	8% plus 4.5%	£1,250	£15,000	£18,000
Royalty plus supply margin	5.5% plus 6% of £4,000 purchases	£790	£9,480	£11,376
Turnover fee on gross turnover	6% of £12,500	£750	£9,000	£10,800
Flat monthly fee plus ad fund	£500 plus £50	£550	£6,600	£7,920

Five franchise fee models on one sales base

McDonald's UK

Fee basis: sales service fee + rent
Main sensitivity: rent may not fall
Comparison treatment: same sales + rent line

Subway UK

Fee basis: weekly royalty + ad fund
Main sensitivity: weekly gross sales
Comparison treatment: 8% + 4.5% on sales

Domino's UK

Fee basis: sales royalty + supply
Main sensitivity: supply margin + royalty
Comparison treatment: royalty + supply markup

Costa Coffee

Fee basis: turnover-based fee
Main sensitivity: turnover may include VAT
Comparison treatment: convert to net sales

A minimum monthly payment, tiered band or review clause can override any row. Ask for the exact clause, the date of the last change and the person who issued it.

Example: sales fall 30%

Trade drops from £10,000 to £7,000 net a month. On the same illustrative rates:

£280a monthThe 4% service fee falls to , £3,360 a year net.
12.5%The % royalty and ad fund falls to £875 a month, £10,500 a year net.
£550The flat fee does not move, so it takes 7.9% of sales instead of 5.5%.

A fixed fee protects the operator when sales rise and hurts when they fall. Rent, minimum payments and mandatory purchasing behave the same way.

VAT treatment and input VAT

HMRC lists VAT rates of 20% standard, 5% reduced and 0% zero, depending on the supply. The agreement or invoice should state how tax is added to each fee. Compare gross cash paid against net cost, then ask an adviser whether input VAT is recoverable on that particular franchisor service.

VAT treatment for franchise fees

Net cost

Subway weekly royalty: net fee
McDonald's service fee: net fee
Input VAT recovery: adviser check

VAT

Subway weekly royalty: check invoice
McDonald's service fee: check agreement
Input VAT recovery: 20% standard

Gross cash paid

Subway weekly royalty: net + VAT
McDonald's service fee: net + VAT
Input VAT recovery: recoverable?

Do not copy the VAT treatment of the outlet's product sales onto the franchisor's service without checking the service itself.

Initial costs, exit charges and renewal

Entry money usually exceeds the first year of fees. Capture every compulsory payment:

Initial franchise fee and any second-territory fee.
Fit-out, equipment, signage and shopfitting variations.
Training charged for staff beyond the owner's place.
Launch marketing with a minimum spend or limited stock.
Software subscriptions that renew on their own terms.
Refundable deposits, kept separate and tied to a return condition.

A franchise budget template records where each figure came from before you compare totals. The government's set-up guide covers legal structures and initial costs that apply to a franchise as much as to an independent start.

Exit and renewal terms are part of the cost. Ask in writing for the transfer fee, notice period, stock buyback price, treatment of unamortised equipment, cost of removing branding and the renewal fee. If a figure is not published, request it with its date and keep the reply with the agreement.

Common questions

Why can a lower percentage still cost more?

The sales base, minimum charge, included services, payment date and VAT treatment differ. A 4% fee on net sales and a 6% fee on turnover including VAT are not the same burden.

How should VAT be handled across the comparison?

Show net cost and gross cash side by side. Whether input VAT is recoverable depends on the service and on your own VAT status.

Which costs sit outside the advertised fee?

Rent, supplier prices, refurbishment cycles, opening hours, local marketing floors and exit charges. Vendor due diligence checks whether the entity and the figures behind them are what they claim.

What makes a comparison verifiable?

A named sales definition, a dated rate, the clause reference and the payment date. One reconciliation of entry cash, recurring cash, mandatory costs and exit charges under the downside case decides the ranking.