Franchises in Argentina: how to assess royalty payments

Two franchises charging the same royalty percentage can involve very different obligations. The difference often lies in which sales count, which deductions are allowed and when payment is due. Before joining a franchise network in Argentina, you need to turn that clause into a calculation you can reproduce and verify, even in a month with low sales.

1. Identify the obligation you are taking on

Royalties are payments linked to operating the franchise. They may be agreed as a percentage, a fixed amount or a combination of both. They should not be confused with the initial franchise fee or advertising contributions: even if they appear together in a commercial proposal, it is worth identifying them separately.

In Argentina, franchise agreements are specifically governed by Articles 1512 to 1524 of the national Civil and Commercial Code. Article 1512 provides for direct or indirect consideration from the franchisee, while Article 1515 includes honouring agreed payment obligations among the franchisee’s duties.

These provisions do not set a standard royalty percentage. The amount and calculation method must therefore be checked in the agreement and its schedules, rather than inferred from what other franchisees supposedly pay.

Ask the franchisor for a complete list of recurring payments and distinguish which form part of the royalty. If the proposal advertises no royalties, check whether there are other payment obligations or forms of indirect remuneration. The absence of a charge labelled ‘royalty’ does not, on its own, mean a lower total cost.

2. Define the calculation basis: what does ‘sales’ mean?

A clause that simply states ‘a percentage of sales’ leaves important questions unanswered. Adding ‘gross’ or ‘net’ is not enough either if those terms are not defined.

Ask for the formula to specify how it treats:

• VAT (IVA in Argentina) and other tax items: whether they are included in or excluded from the calculation basis, and how they are identified.
• Discounts and returns: which amount counts and in which period a credit note is deducted.
• Sales through apps or platforms: whether the calculation uses the amount paid by the customer or the amount received after commission.
• Credit sales: whether royalties arise when the sale is invoiced or when payment is received, and what happens with bad debts.
• Advance payments and gift cards: when they count and how double-counting the same transaction is avoided.
• Delivery charges: whether they form part of the sale subject to royalties, even when passed on to a third party.

Do not assume that a commercial or accounting deduction will automatically be allowed when calculating royalties. It must be supported by the agreed terms.

A useful exercise is to trace a sale from the sales document through to the bank deposit. Compare the invoiced price, tax withholdings, commissions and money actually received. Then identify which of those amounts the agreement uses. This helps you avoid confusing a royalty on invoiced sales with a royalty on payments received.

3. Check minimums, tiers and payment deadlines

Where a minimum royalty applies, ask whether it replaces the percentage-based calculation when that produces a lower amount, or is added to it. These are different mechanisms, and the wording should distinguish between them unambiguously.

It is also worth checking when the payment obligation starts to accrue: on signing, handover of the premises, opening or the first sale. If royalties are charged during periods when the business is not trading, include that obligation in your financial assessment.

For turnover-based tiers, clarify whether a new rate applies to all sales in the period or only to the portion above the threshold. Also check how fixed amounts are adjusted and who can change the terms. Do not accept a verbal explanation as a substitute for a contractual formula you can verify.

Timing matters too. A royalty falling due before card or platform settlements reach your account may require you to use your own funds to pay it. Note the reporting period’s closing date, the deadline for submitting the royalty statement, the payment due date and the consequences of late payment. Ask how discrepancies are resolved, including how any undisputed amount must be handled.

4. Test the clause before signing

Ask the franchisor for a sample royalty statement and reproduce the calculation with your accountant using the proposed formula. You do not need identifiable data from another outlet: an anonymised case or an illustrative example can show how the calculation works.

Prepare three scenarios: a normal month, a low-turnover month and a month with substantial returns. For each, record the sales included in the calculation, permitted deductions, percentage, applicable minimum, taxes on the royalty payment and payment date.

If you arrive at different results, have the wording corrected before committing. Specify which documents support the royalty statement and how errors or overpayments are corrected. A lawyer should check that the agreement and its schedules describe the same mechanism.

Practical conclusion: do not compare percentages alone. Before buying, make sure you can calculate how much you owe, which transactions it relates to and when it is due, without relying on further explanations.