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

Two franchise offers with the same ongoing fee percentage can have very different actual costs. The difference often lies in what the franchisor counts as turnover, when the payment obligation arises and which deductions are allowed. Before joining a franchise network, do not simply compare percentages: ask for a definition of the fee calculation basis and a worked example using the types of transaction you expect at your outlet.

1. Establish which amount the percentage applies to

The ongoing franchise fee may be a fixed amount, a percentage of turnover or a combination of the two. If there is a minimum monthly fee, check whether it replaces the percentage-based fee when that would be lower, or is charged on top. This distinction must be unambiguous.

Terms such as “total turnover”, “gross sales” or “all revenue” are not sufficient without further explanation. In particular, check whether the calculation basis includes:

• VAT charged to the customer;
• delivery charges collected;
• advance payments for future supplies;
• gift voucher sales or their subsequent redemption;
• proceeds from selling used equipment or other receipts outside ordinary sales.

Distinguish the contractual calculation basis from accounting revenue. The agreement may use its own definition of turnover, so the figure in your profit and loss account will not necessarily match the amount on which the franchisor calculates the fee. Your accountant should check whether your system can reliably identify the items specified in the agreement.

Also ask whether the obligation arises when an invoice is issued, when goods or services are supplied, or when payment is received. If you pay fees on unpaid invoices, agree how debts that ultimately prove irrecoverable will be treated.

2. Clarify discounts, refunds and platform sales

A customer discount reduces your earnings, but it may not reduce the franchise fee if the agreement bases the calculation on the pre-discount price. Ask for clear wording on whether the price actually charged is recognised, and whether discounts you set yourself are treated differently from mandatory franchisor promotions.

For returned goods or cancelled services, check whether you can reduce the calculation basis in the month of the refund, even if the original sale took place in an earlier reporting period. Agree what evidence is required and what happens when refunds exceed sales in that month. Otherwise, you could pay a fee on a sale that was subsequently reversed.

Sales through delivery and other intermediary platforms require particular attention. The amount reaching your bank account is often already net of the platform’s commission. The franchisor may nevertheless stipulate that the fee is calculated on the full value of the sale to the customer. These are different calculation bases, and you must factor the difference into your assessment of that channel’s profitability.

For the brand’s shared online shop, establish who is credited with each sale and which report determines this. If you only prepare or deliver the order, the agreement needs to make clear whether the full order value is included in your calculation basis or whether you receive a separate payment for the service provided.

3. Request a worked calculation and rules for corrections

Before signing, prepare a sample monthly report with your accountant. Include ordinary sales, discounted sales, a refund relating to the previous month, a gift voucher, an unpaid invoice and an order placed through a platform. Ask the franchisor to confirm in writing whether each item is included in the calculation basis and, if so, when.

Do not test only a good month. Calculate the fee for a period of weak sales and a temporary outlet closure too. If there is a minimum amount, ask whether it applies from signing, from opening or after a separately agreed initial period.

The agreement or a schedule to it should cover:

• the calculation period and reporting deadline;
• the data source and how discrepancies are reconciled;
• the deadline for issuing invoices and the payment due date;
• the procedure for reporting errors and issuing credit notes;
• the treatment of overpayments and subsequent adjustments.

Turn verbal explanations into contractual provisions. A worked example is a useful addition, but it does not replace a clear definition of the calculation basis. If the franchisor can change the rate or introduce new fee components, ask for predefined conditions, a calculation method and a notice period. Do not assume that the advertised percentage will remain unchanged throughout the agreement.

4. Check Croatia’s legal and tax framework

Croatia has no specific franchise legislation and no mandatory standardised pre-contractual franchise disclosure document. A franchise agreement is an innominate contract — a type of contract not specifically defined in legislation. The Civil Obligations Act (Zakon o obveznim odnosima) is central to contractual obligations, including the rules on performance, interpretation and good faith and fair dealing.

This means there is no single statutory basis for calculating franchise fees that you can simply take for granted. A lawyer should check that the fee provisions are sufficiently precise and that the mechanism for changing them is legally permissible.

Check the tax treatment separately under the Value Added Tax Act (Zakon o porezu na dodanu vrijednost) and, where relevant, the Corporate Income Tax Act (Zakon o porezu na dobit). If the franchisor is based abroad, your accountant should establish whether the reverse charge mechanism, withholding tax or a relevant international tax treaty applies. Excluding VAT from the contractual calculation basis is not the same issue as the tax treatment of the invoice for the fee itself.

Practical takeaway: before signing, secure a precise calculation basis, a confirmed worked example and a correction procedure. Only then does the ongoing fee percentage become a cost you can reliably budget for.