Buying a franchise: how to agree the calculation of ongoing fees

When joining a franchise network, it is easy to compare offers by looking at the percentage charged as an ongoing franchise fee. Yet a lower percentage does not necessarily mean a lower cost. What matters is what it applies to, when the payment obligation arises and whether any minimum charges apply. Before buying a franchise, agree a calculation method you can check independently, rather than simply accepting the fee description in the offer.

1. Start by defining the calculation base precisely

An ongoing franchise fee may be fixed, turnover-based or a combination of the two. Terms such as ‘total turnover’, ‘gross revenue’ and ‘net sales’ are not clear enough unless the agreement explains what they include. Do not assume that the franchisor understands them in the same way as your accountant.

Ask for the agreement or a schedule to it to answer the following questions:

• Does the calculation base include or exclude VAT?
• Are discounts actually granted, refunds and cancelled invoices deducted?
• Are delivery charges paid by customers included?
• How are sales through third-party platforms and their commissions treated?
• When are gift cards, advance payments and instalment sales recognised?
• Is income from activities outside the franchise offering included?

Pay particular attention to the difference between issuing an invoice and receiving payment. If the fee becomes payable when an invoice is issued, you may owe it even if the customer is late paying. This is an important risk for businesses that offer credit terms.

Ask for a sample calculation using hypothetical transactions, including a discount, a refund and a sale through a platform. Have the franchisor and your accountant calculate it separately. Different results indicate that the definition needs refining before you sign.

2. Check the minimum fee and when charging begins

A minimum monthly fee can significantly affect costs in months when sales are weaker. The agreement must clearly state whether you pay the higher of the two amounts — the percentage-based fee or the minimum fee — or whether a fixed element is added to the percentage-based charge. These models are not financially equivalent.

Ask for projections based on three scenarios relevant to your business: lower sales, expected sales and a temporary closure. In each case, calculate the actual proportion of sales that goes towards the fee. If a minimum charge applies, that proportion rises as sales fall.

The date when charging begins is equally important. Is it when the agreement is signed, when training ends, on the planned opening date or when trading actually starts? If your premises are not yet ready but fees are already accruing, you will be paying before you can generate revenue.

Negotiate written provisions covering:

• an initial period with a reduced minimum fee or no minimum fee;
• deferred charging where the opening is delayed because the franchisor has not met its obligations;
• arrangements during a justified temporary closure;
• the exact formula for any annual adjustment to the fee.

Do not rely on a verbal promise that the minimum is ‘not charged in practice’. If the agreement allows it to be charged, assume it will apply when estimating your costs.

3. Set out reporting, corrections and checks

Fee calculations should be linked to data that your business can reliably export. If the franchisor requires specific monthly reports, check before buying whether your point-of-sale or accounting system supports them and who pays for any necessary changes.

Agree deadlines for submitting reports, issuing invoices and making payments. Include a procedure for subsequent corrections: for example, how goods returned in the following month affect a fee already calculated. Without this, you could pay a fee on a sale that is later reversed.

The franchisor’s right to check data should have clear limits. Agree which records may be reviewed, how much notice is required, how often checks can take place and what confidentiality obligations apply. Access to data should be limited to what is needed to verify the calculation. If the records contain personal data, appropriate data protection obligations must also be addressed.

Check who pays for an additional audit and under what conditions. Avoid provisions that transfer all audit costs to the franchisee without limit, regardless of the findings. It is useful to agree a procedure for disputing invoices, paying the undisputed amount and setting a deadline for reconciling records together. Raising a dispute does not automatically entitle you to withhold payment.

4. Check the legal and tax framework in Croatia

Croatia has no dedicated franchise law or specific mandatory pre-contractual disclosure regime for franchises. A franchise agreement is an innominate contract — one not specifically defined as a separate contract type in law — and is governed by the Croatian Civil Obligations Act, including its rules on entering into and performing contracts and the principle of good faith and fair dealing. The franchise register maintained by the Croatian Chamber of Economy (HGK) is an information tool, not a mandatory registration scheme or state approval of contractual terms.

Depending on the nature of the relationship, the Croatian Competition Act, relevant European Union rules, tax legislation and personal data protection rules also apply. Franchise network rules and voluntary codes of ethics do not replace the law or a clearly agreed fee formula.

If you pay the fee to a franchisor outside Croatia, your accountant should check the VAT treatment, any withholding tax and the application of a double taxation treaty. Check whether the agreement requires the franchisor to receive the full amount after any tax deductions: such a clause could increase your actual cost.

Practical takeaway: before signing, secure a clear calculation base, a sample calculation and a correction procedure. If you cannot use the agreement to calculate independently what you would owe for a month with refunds and weaker sales, the calculation method is not yet precise enough.