Buying a franchise: how ongoing fees are calculated

A low percentage rate does not necessarily mean a low-cost franchise. The basis on which the ongoing fee is calculated, when it becomes payable and any minimum payment also matter. Before joining a franchise network, ask to see the full calculation applied to specific trading scenarios. Only then will you know whether you will be paying fees on actual sales alone, or also on amounts you do not get to keep.

1. Look for the definition of turnover, not just the rate

The Czech Republic has no dedicated franchise legislation. A franchise agreement is usually concluded as an unnamed contract under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General rules of contract law apply, along with provisions on matters such as licensing, depending on the agreement’s content. The specific contractual terms are therefore crucial to calculating ongoing fees.

Czech law does not require franchise agreements to be specially registered, nor does it require a standardised franchise disclosure document. General pre-contractual disclosure duties do, however, apply. The European Code of Ethics for Franchising is a self-regulatory code, not legislation; you need to check whether it is binding in your particular relationship.

Do not treat the word ‘turnover’ as a sufficient definition. The contractual basis for calculating the fee may differ from turnover for tax purposes or the figure your accounting software labels as sales revenue. Ask for a precise list of income included and explicit exclusions.

In particular, check whether the calculation uses prices inclusive or exclusive of VAT, whether it includes delivery charges paid by customers, and whether it covers only sales made by the outlet concerned. If you have other business activities, it must be clear that unrelated income will not automatically be included. Also distinguish between VAT included in the calculation basis and any VAT charged on the fee itself.

2. Test the calculation against non-standard sales

Ask the franchisor for a sample monthly fee statement and work with your accountant to put together a few test transactions. This is not about forecasting profitability, but about checking whether both parties calculate the same fee from the same figures.

Include at least the following scenarios:

• Customer discount: Is the fee calculated on the actual discounted price or the original list price?
• Returned goods or a cancelled service: Does the refund reduce the calculation basis, and in which period is it reflected?
• Unpaid invoice: Does the fee arise when the sale is made or only when payment is received?
• Advance payment: Is it included when received or when the order is completed, or is there a risk of counting it twice?
• Sale through a third-party platform: Is the calculation based on the full price paid by the customer or the amount remaining after commission?
• Order through the central online shop: Which outlet is it allocated to, and who reports any cancellation?

Do not assume that any of these approaches is the statutory default. The agreement should specify how each situation is handled. For a platform sale, for example, the fee may be calculated on the full price even though the outlet receives only the amount left after commission is deducted. You need to understand this before signing.

Record the test results in an agreed schedule containing worked examples. A verbal explanation alone is not enough if the wording of the agreement allows a different approach.

3. Check minimum fees and scope for increases

A percentage-based fee may be accompanied by a minimum monthly fee. Find out whether you pay the higher of the two amounts or whether the fixed and percentage components are added together. Similarly, check whether there is an annual reconciliation payment or a different rate once sales exceed a specified threshold.

Pay particular attention to the first and last part-months and to temporary closures. Insist on a clear rule stating whether the minimum is reduced pro rata and whether it remains payable when the outlet has no sales. Zero turnover does not, in itself, necessarily mean no payment is due under the contract.

If the agreement allows rates to change or refers to a separate fee schedule, check the mechanism for making changes. For index-linked increases, the index used, reference period, frequency of adjustment and date of the first increase must be identifiable. For other changes, negotiate the notice period, limits on changes and a procedure for handling objections. Have a lawyer assess any general right for the franchisor to ‘adjust fees as necessary’; do not assume that every unilateral change will automatically take effect.

4. Make sure fee statements can be checked

The agreement should specify the data source, reporting period, deadline for submitting supporting information and payment due date. Also establish whether you or the franchisor calculates the fee, and whether you will receive a breakdown that allows you to check it independently.

Agree a corrections procedure: whom to notify of an error, what documents are needed to support it, and when an overpayment will be refunded or credited. For refunds carried over into a subsequent month, the system must allow them to be linked to the original transaction. Also check how a correction identified after the final fee statement will be handled.

Do not confuse an objection to the calculation with an automatic right to stop paying. A lawyer should check how the agreement distinguishes between disputed and undisputed amounts, and what consequences late payment carries.

Practical takeaway: Before signing, ask for a precise definition of the calculation basis, a worked example, and rules for corrections and rate changes. An ongoing fee is only clear enough when you can recalculate it yourself.