Franchise royalties: how to check the cost before you buy

A seemingly low royalty rate can hide a heavy cash flow burden. Before buying a franchise, comparing percentages is not enough: you need to understand what they apply to, when payments fall due and what other charges come with the business. For prospective franchisees in Brazil, this analysis helps identify a brand whose financial terms match their available capital and management capacity.

1. Find the charges in the disclosure document and contract

Law No. 13,966/2019, Brazil’s current Franchise Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to provide clear information on recurring fees and other amounts payable by the franchisee to the franchisor or designated third parties. This includes the basis on which they are calculated and the services they pay for or purposes they serve.

The listed items include recurring payments for using the system, brand and other rights, equipment or business premises rental, advertising fees and minimum insurance requirements. The COF must also contain the full template of the standard contract and, where applicable, the preliminary agreement, together with their annexes.

The COF must be supplied at least ten days before the contract or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. A charge described as a ‘reservation fee’ should not be used to circumvent this statutory waiting period.

Create a table with four columns: charge, provision in the COF, provision in the contract and outstanding question. If the sales presentation promises terms that do not appear in the documents, ask for them to be formally recorded before proceeding.

Failure to comply with the legal requirements may provide grounds for remedies to protect the prospective franchisee, including challenging the contract’s validity and seeking repayment in the circumstances provided for by law. This requires a legal assessment of the particular case; it is not an automatic outcome.

2. Establish exactly what goes into the calculation

‘Royalties on turnover’ is not a sufficiently detailed description for forecasting expenses. Request the contractual definition of turnover and a worked calculation based on a realistic trading scenario.

Get written clarification on the following:

• Is the calculation based on sales made or money actually received?
• Are discounts, cancellations and returns deducted? In which period?
• Are taxes and app or platform commissions included in the calculation base?
• Do sales paid in instalments trigger the full royalty charge in the month of sale?
• Is there a minimum monthly payment, even when turnover is low?
• Are charges payable during set-up, temporary closure or refurbishment?

Hypothetical example: an outlet makes R$100,000 in sales during the month and pays royalties of 5% on sales, with no deductions. The charge will be R$5,000. If some of those sales receipts arrive later, the royalties may fall due before the corresponding money is received.

A formula combining a percentage with a monthly minimum can make the effective rate higher in weaker months. Check whether the higher amount applies, whether the two amounts are added together or whether another formula is used. Do not assume the most favourable interpretation.

Also ask about the procedures for checking sales: the franchisor’s access to the system, correction of discrepancies, audits and any costs associated with these checks.

3. Add up related charges and check what you receive in return

Royalties do not necessarily represent the full cost of belonging to the network. List advertising fund contributions, compulsory systems, software licences, additional training and other contractual expenses separately.

For each item, record the recipient, payment frequency, due date, adjustment mechanism and whether it can be changed. Ask which services are included in the royalties and which require an extra payment. ‘Comprehensive support’ needs to translate into verifiable deliverables, such as support channels, scheduled visits and training content.

For advertising, check whether the contribution to the network replaces or comes on top of an obligation to spend on local promotion. Ask how the funds are managed and which reports will be made available, rather than assuming there is a single standard approach to accounting for the money.

Examine compulsory purchases as well. Even when they do not appear as a separate fee, prices, delivery charges and minimum order quantities can increase operating costs. Comparisons between brands should take all these factors into account, not just the advertised percentage.

4. Test the contract’s cash flow impact before signing

With help from an accountant, prepare monthly forecasts of sales, receipts, operating expenses and network charges. Distinguish profitability from available cash: a business can record sufficient sales yet still lack the money to meet its obligations when they fall due.

Model a slower start, delayed receipts and rising costs. Check whether minimum royalties, advertising contributions and system charges remain payable in these scenarios. Also review interest, penalties, guarantees and the contractual consequences of late payment.

Take any discrepancies to a lawyer with franchise experience. If you negotiate a payment-free period, an introductory discount or a cap on fee increases, record its duration, conditions and the amounts payable once the concession ends. Do not treat a temporary concession as a permanent cost reduction.

Practical summary: only proceed once you can reproduce every charge in a spreadsheet, find the relevant provision in the documents and demonstrate that the business has enough cash to withstand weaker-than-expected months. A low percentage alone does not make a franchise affordable.