Buying a Franchise in Australia: Check Royalty Calculations

A franchise royalty is an ongoing payment for rights under the franchise arrangement. It may be a fixed amount, a percentage of turnover or a combination. Before joining Australia’s franchising community, look beyond the headline rate: the definition of sales and the payment rules can make apparently similar offers cost very different amounts.

1. Identify exactly what the royalty covers

Start by asking the franchisor for a written explanation of every recurring royalty or service charge. Match that explanation to the franchise agreement, its fee schedules and the disclosure document. Do not assume a payment described as a ‘management fee’ works differently from a royalty; examine how it is calculated and what triggers it.

Establish whether the arrangement uses:

• A fixed weekly or monthly payment, regardless of sales.
• A percentage of a defined sales or turnover figure.
• A minimum payment, even when the percentage calculation produces less.
• Different rates for particular products, services or sales channels.
• A stepped rate that changes when turnover reaches a threshold.

For stepped rates, ask whether the new rate applies only to sales above the threshold or to all sales in that period. Also check whether fees begin on signing, during training or only once trading starts.

Keep royalties separate from marketing contributions, software charges and other recurring payments. Your aim is to understand this fee precisely, without confusing it with the total cost of operating the franchise.

2. Read the definition of turnover line by line

A percentage is meaningful only when you know the amount to which it applies. Ask your accountant to examine the agreement’s definition of ‘gross sales’, ‘revenue’ or ‘turnover’, rather than substituting their usual accounting meaning.

Questions worth resolving include:

• Is GST included or excluded from the calculation?
• Are refunds, cancellations and customer discounts deducted?
• Does a gift card count when sold, when redeemed or under another rule?
• Are online orders attributed to your business included?
• Are delivery-platform commissions deducted before calculating the royalty?
• Do invoiced sales count before the customer pays?
• How are bad debts, chargebacks and refunded deposits treated?

For example, a customer might pay through a delivery platform that deducts its commission before passing money to your business. If the agreement calculates royalties on the full customer sale, your royalty is not necessarily based on the smaller amount reaching your bank account.

None of these treatments should be assumed. Request written clarification wherever the documents leave room for different interpretations. If the answer changes the bargain, ask your lawyer whether it needs to be expressly recorded in the agreement.

3. Test the calculation and collection process

Ask for a worked royalty statement using fictional transactions. Include an ordinary sale, a discounted sale, a refund and a sale through a third-party platform. Have your accountant reproduce the calculation independently.

Then test three trading conditions: lower sales, expected sales and higher sales. A fixed minimum can make the effective royalty burden heavier during a quiet period. Higher turnover can also trigger a different rate, depending on the wording.

Next, follow the payment timetable. Check when sales must be reported, when the franchisor issues a statement and when payment is collected. If customers pay later than the royalty falls due, identify how that gap will be funded.

Review the correction process too. Can you challenge an incorrect statement before a direct debit? Are refunds credited in the same period or later? Who can access sales records, and what audit costs could be charged to you? Ask for the relevant contractual provisions, not simply a description of usual practice.

4. Check the legal position before agreeing

Australia’s mandatory Franchising Code of Conduct regulates the franchising community and is enforced by the Australian Competition and Consumer Commission. A new Code commenced on 1 April 2025, with some provisions applying from 1 November 2025. Your lawyer should confirm which rules apply to your proposed agreement.

The disclosure document must contain information about relevant franchise costs, and the agreement establishes your contractual payment obligations. The Code also requires parties to act in good faith, including during dealings before an agreement is entered into. Australian Consumer Law prohibits misleading or deceptive conduct; a sales explanation should not contradict the actual fee arrangements.

Ask your lawyer to check any power to increase fixed fees, change calculation methods or introduce additional charges. Clarify the adjustment formula, notice requirements and any limits. Do not assume statutory protections make an expensive but clearly agreed royalty commercially suitable.

Practical takeaway: Before signing, obtain a written royalty formula, a worked statement and an independent check. You should be able to explain what counts as sales, what you owe and when you must pay it.