Defining Franchise Royalties Before Expanding in Australia

A royalty percentage is only half a fee decision. Before franchising your existing Australian business, you need to define the sales it applies to, when those sales count and how adjustments work. A clear calculation helps prospective franchisees assess the offer and reduces avoidable disputes within your franchise community.

1. Choose a royalty structure you can explain

Royalties commonly take the form of a percentage of sales, a fixed recurring amount or a combination. Each allocates risk differently. A fixed fee remains payable when sales fall, while a sales-based royalty generally moves with revenue rather than profit.

Start by identifying what the royalty pays for. This might include access to the business system, ongoing support and brand development. Separate it from any initial franchise fee, technology charge or marketing contribution so franchisees can understand the complete payment structure.

Do not select a percentage simply because another franchise uses it. Its margins, support commitments and additional charges may differ substantially from yours.

If you propose a minimum royalty, test its effect during a slow opening period and seasonal downturns. Ask your accountant to assess the combined fee burden against realistic operating costs, not just whether the royalty looks affordable in isolation.

2. Define the sales figure behind the percentage

“Gross sales” needs a contractual definition, not an assumption that everyone understands it. Prepare a plain-English calculation specification for your franchise lawyer and accountant to review.

Resolve these questions before drafting:

• GST: Is the sales base calculated before or after GST? Distinguish this from any GST treatment of the royalty invoice itself.
• Discounts: Does the royalty apply to the amount actually charged or the undiscounted price?
• Refunds: When can a refunded sale reduce the sales base, and what evidence is needed?
• Delivery platforms: Is the base the customer’s purchase amount or the net amount received after platform commission?
• Gift cards: Does the sale count when the card is sold or redeemed, and how will you prevent double counting?
• Deposits and credit sales: Does revenue count when money arrives, when an invoice is raised or when goods or services are supplied?

Also address cancelled orders, chargebacks and customer payments collected centrally. Where a payment includes delivery charges or other pass-through amounts, specify whether they count.

These are commercial choices to document carefully, not universal rules imposed on every Australian franchise. Use worked examples to expose ambiguities before they become recurring disagreements.

3. Test the calculation using actual transactions

Use a representative sample of transactions from your existing business. Include ordinary trading, promotions, refunds and sales through third-party platforms. Recalculate the proposed royalty manually, then compare it with the result your reporting system produces.

For example, a platform may deduct commission before transferring money to the business. If the agreement bases royalties on sales before commission, a bank-deposit report alone will not produce the correct result.

Create a sample royalty statement showing:

• the reporting period;
• sales included in the calculation;
• permitted deductions and adjustments;
• the royalty rate or fixed charge;
• any applicable tax and the total payable.

Decide how late refunds and reporting errors will be corrected. A credit on the next statement may be administratively sensible, but the process must match the agreement. Establish who can approve adjustments and how franchisees can query a calculation without losing the supporting transaction trail.

4. Align the documents before making an offer

Australia’s mandatory Franchising Code of Conduct operates under the Competition and Consumer Act 2010 and is enforced by the Australian Competition and Consumer Commission. It requires pre-contract disclosure and imposes good faith obligations. The Australian Consumer Law also prohibits misleading or deceptive conduct.

Your franchise agreement should establish the royalty obligation, calculation base, payment timing and relevant reporting requirements. The disclosure document must accurately explain the applicable fees and payments. Promotional explanations and sample calculations should agree with both documents.

Prospective franchisees generally must receive the disclosure document, proposed agreement and a copy of the Code at least 14 days before entering the agreement or making a non-refundable payment. The prescribed information statement must be provided earlier, before the other disclosure documents. Have your lawyer confirm the applicable process before accepting money.

Do not leave essential fee definitions to an informal spreadsheet or assume an operations manual can override the contract. Obtain advice on any proposed discretion to change fees or their calculation, including unfair contract term risks.

Practical takeaway: Before offering your first franchise, produce one clear royalty definition and one transaction-tested sample statement. Have your accountant verify the arithmetic and your franchise lawyer align the legal documents.