Ongoing franchise fees: how to define turnover

When expanding your own business into a franchise network, it is easy to adopt a seemingly simple rule: the franchisee pays a percentage of turnover. Yet the till, accounting records and bank statement may all show different figures. Before offering your first franchise, you need to define precisely the basis on which the ongoing fee will be calculated. What matters is not just the rate, but also which sales count, when they count and how adjustments are made.

1. Separate the contractual fee basis from accounting terminology

The Czech Republic has no specific franchise legislation or statutory rate for ongoing franchise fees. A franchise agreement is usually concluded as an agreement not specifically defined by law under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General rules governing contractual obligations apply, alongside licensing, competition, accounting and tax rules, depending on the nature of the arrangement.

Define the basis for calculating the fee directly in the agreement or a binding schedule to it. The word “turnover” alone can lead to disputes over whether it means invoiced amounts, accounting revenue, payments received or sales recorded through the till. Even a reference to turnover for VAT purposes may not reflect the parties’ commercial intentions.

Specify whether the fee is calculated on amounts excluding VAT, which activities it covers and which outlet the sales belong to. If a franchisee also carries on other business activities, establish how sales under the franchise concept will be separated out. Have the tax treatment of the fee itself assessed separately; it cannot be determined simply by the title of the agreement.

2. Decide how to treat discounts, refunds and vouchers

Start with the actual types of transaction at your existing outlet. For each one, decide how it will enter the calculation. The aim is not to find a single mandatory approach, but to agree predictable rules that the point-of-sale system can process correctly.

• Customer discounts: specify whether the actual price after discount is included. Distinguish between a discount funded by the franchisee and a contribution from head office that reimburses it.
• Returned goods and cancelled services: establish how a documented refund reduces the fee basis and in which period the adjustment is made.
• Gift vouchers: choose when to include their value so that the same amount is not counted both when the voucher is sold and when it is redeemed.
• Advance payments: state whether these count when received or only when the relevant sale takes place.
• Tips: explicitly address amounts that the outlet merely collects on behalf of employees.

For vouchers redeemable across the network, also separate the fee calculation from settlement between outlets. The franchisee who sells a voucher may not be the one who supplies the goods or services to the customer. The contractual rule for the fee does not replace the accounting and tax rules governing vouchers.

3. Account for online sales and platform commissions

Sales through delivery or booking platforms are a common source of misunderstanding. The customer pays a particular price, but the franchisee receives an amount net of commission. If the agreement includes the full price of the relevant sale, the net payment credited to the bank account cannot automatically be used instead.

Decide explicitly whether platform commissions reduce the fee basis. Apply the same scrutiny to payment gateway transaction fees, delivery charges and amounts the platform collects in its own name. Not every item on a customer’s receipt necessarily represents a sale by the franchisee.

For a central online shop, establish who contracts with the customer and what role the local franchisee plays. Simply acting as a collection point does not necessarily mean that the whole order counts towards that franchisee’s fee basis. The rule must reflect the actual contractual and accounting arrangements, rather than merely which branch physically handled the goods.

4. Set the calculation period, adjustment process and payment terms

The definition of the fee basis needs a timing rule. Choose the trigger: for example, when the sale takes place or when payment is received. Check what happens with an unpaid invoice, a part-payment or a subsequent refund.

The agreement should cover at least:

• the calculation period and deadline for submitting supporting information;
• the calculation method, rounding rules and any currency conversion;
• the procedure for issuing the invoice or other relevant document, and the payment deadline;
• the deadline and procedure for reporting an error;
• how any difference will subsequently be settled.

If you agree a minimum monthly fee, state whether it is compared with the percentage-based amount or added to it. Also address a partial first month and temporary closure of the outlet. A change to the rate or fee basis should not be hidden in a technical update to the point-of-sale system; it needs an appropriate contractual basis.

5. Test the calculation before recruiting a franchisee

Take a completed trading period from your own outlet and run a trial fee calculation using the proposed rules. Add a hypothetical refund relating to the previous month, a voucher redeemed at another outlet and an order placed through a platform. Ask two people to perform the calculation independently, using only the written rules.

If they reach different results, revise the definitions. The outcome should be a concise calculation sheet with specific examples, consistent with both the agreement and the way the point-of-sale system works. A lawyer should check that the provisions are enforceable, an accountant should verify that they align with the records, and the technology provider should confirm that the necessary data is available.

Practical takeaway: First establish clearly what the fee is calculated on and when sales count; only then confirm the rate. A clear fee basis protects both head office’s income and franchisees’ trust in the network.