Franchising in Argentina: how to review royalty fees

A seemingly low royalty can prove expensive if it applies to an overly broad calculation basis or includes minimum payments that are difficult to sustain. Before joining a franchise network in Argentina, you need to understand how much you will pay, which transactions are covered and what checks apply. This guide focuses on one specific review: the royalty clause and its monthly calculation.

1. Identify every component of the royalty

A royalty is a recurring payment that can take various forms. Do not assume it will always be a percentage of sales or that it will cover every service needed to run the business.

Ask for the draft agreement and its schedules to distinguish clearly between:

• Variable percentage: which amount it applies to and when the obligation to pay arises.
• Fixed amount: the currency, payment deadline and adjustment mechanism.
• Guaranteed minimum: whether it replaces the percentage-based payment when that is lower, or is added to it.
• Additional charges: software licences, administration or other items billed separately.

The distinction between a minimum payment and an additional charge is crucial. If the agreement specifies “a percentage subject to a monthly minimum”, ask for a formula that rules out conflicting interpretations.

Also check when payments start to accrue: on signing, handover of the premises, opening to the public or another milestone. Any grace period must be set out in writing, along with its conditions and the consequences of a delayed opening.

2. Define what “sales” means in the agreement

The most sensitive issue is often the basis used to calculate royalties. Terms such as “total turnover” or “gross revenue” can lead to disputes without a precise contractual definition. Do not confuse “gross revenue” with Argentina’s provincial tax of the same name, known as Ingresos Brutos.

Request a sample royalty calculation covering these situations:

• VAT (IVA): whether the calculation includes or excludes the tax charged.
• Discounts: whether it uses the list price or the actual selling price.
• Returns and cancellations: how they are deducted and in which period.
• Sales through platforms: whether it uses the price charged to the customer or the amount received after commission.
• Instalments and outstanding payments: whether the royalty becomes due when the sale is invoiced or when payment is received.
• Vouchers and gift cards: how double-counting the same transaction is avoided.

For example, a platform may transfer less than the selling price to you because it deducts commission. If the royalty is calculated on the sale before those deductions, you will pay it on a sum greater than the cash received. That is not necessarily improper, but it is a cost you need to understand.

Ask for a worked royalty calculation using hypothetical transactions, rather than just a sales explanation. The formula should allow you and your accountant to reach the same result as the franchisor.

3. Review minimum payments, adjustments and unilateral changes

A monthly minimum can be particularly burdensome during the start-up phase or quieter months. Ask whether there is a phased payment structure and what happens if operations are interrupted. Do not assume that a suspension of sales automatically removes the obligation to pay.

For amounts subject to adjustment, identify the index or benchmark, adjustment frequency, starting date and formula. If there are obligations in a foreign currency, a lawyer should review the clause against current legislation, including the currency of payment and any conversion mechanism.

Pay attention to references to “current fee schedules” or documents that the franchisor can amend. A significant financial obligation should not be hidden in a schedule you have not received.

Prepare three trial calculations: one for a low-sales month, one for a typical month and one with a high volume of returns. The aim is not to forecast profitability, but to check how the clause works and identify unexpected charges.

4. Agree on checks and understand the legal framework

In Argentina, franchise agreements are specifically regulated by Articles 1512 to 1524 of the Argentine Civil and Commercial Code. Article 1512 provides for direct or indirect consideration from the franchisee, but these provisions do not set a generally applicable mandatory royalty percentage.

Article 1514 requires the franchisor, before signing, to provide economic and financial information covering two years of performance of units similar to the one being offered, which have operated for a sufficient period. That obligation does not replace the need to define in the agreement how your payments will be calculated.

Article 1515 also requires the franchisee to provide information reasonably requested about the business and facilitate agreed inspections. You should therefore review which records will be checked, who will have access and how the information will be protected.

Agree on a procedure for reporting discrepancies, correcting errors and documenting adjustments. Also review late-payment interest, audit costs and the conditions under which those costs can be passed on to you. If a dispute arises, avoid deducting amounts unilaterally without taking advice.

Practical takeaway: before signing, obtain a complete formula, a sample royalty calculation and a review procedure. If you cannot reproduce the calculation, the clause still needs clarification.