Buying a franchise: clarify how royalties are calculated

When you buy into a franchise network, the royalty rate is only half the equation. The other half is which amounts the rate applies to, and when payment becomes due. Two agreements with the same rate can therefore cost different amounts. Before signing, you should be able to reproduce the royalty calculation using actual sales examples and check the result without relying on the franchisor’s explanation.

1. Find the agreement’s precise definition of turnover

A royalty is an ongoing payment to the franchisor for being part of the franchise system. It may, for example, be based on turnover, set at a fixed amount or combine the two. For turnover-based royalties, terms such as ‘gross turnover’, ‘net sales’ and ‘total sales’ are not enough on their own. The agreement must explain what they include.

Ask for a definition that addresses:

• VAT: Are royalties calculated on sales including or excluding VAT?
• Discounts: Is the calculation based on what the customer actually pays or the price before discount?
• Returns and credit notes: How and when do they reduce the amount on which royalties are calculated?
• Delivery and other charges: Are amounts charged alongside the goods included?
• Bad debts: Must you pay royalties on invoiced sales even if the customer never pays?
• Gift cards: Are royalties triggered when a card is issued or redeemed, and how is double counting avoided?

Not every point will necessarily be relevant to your franchise. However, each relevant point should have one unambiguous answer. A reference to ‘the network’s usual practice’ makes it difficult to know your obligations in advance.

Also distinguish between money received and turnover. Money arriving in your bank account may be a deposit or an advance payment, rather than a completed sale. It should be possible to reconcile the agreement’s royalty calculation basis with your accounting records, even where the timing differs.

2. Follow the money through each sales channel

Sales through a platform may result in a different amount reaching you than sales made directly in the shop. If a platform deducts commission, the agreement may still require royalties on the customer’s full purchase amount. The commission then becomes a separate expense, rather than a deduction from the royalty calculation basis.

The key question is therefore not simply what you receive, but which sales the agreement attributes to your business. Pay particular attention to orders placed through the network’s website, centrally negotiated corporate contracts and orders shared between several outlets.

Ask the franchisor to walk you through a typical order, from the customer’s payment to your settlement. Have them show the sales amount, VAT, discounts, platform deductions and royalties separately. If the network collects payment centrally, you should still receive the supporting settlement records.

For network-wide promotions, it should be clear who funds the discount and how any reimbursement from the franchisor is treated. Otherwise, a promotion could both reduce your margin and leave you paying royalties on a higher amount than expected. Clear calculations help build trust within the franchise network.

3. Check minimum payments and adjustments

A royalty agreement may include a minimum payment even if it is presented as a percentage rate. Clarify whether the minimum replaces the calculated royalty when that figure is lower, or whether it is an additional fixed payment.

Also check when the minimum payment starts to apply. Is it on signing, gaining access to the systems or opening for business? This can matter if there is a gap between entering into the agreement and making your first sale.

Next, look for adjustment provisions. Can the rate, minimum payment or calculation basis change? If an amount is index-linked, the index, starting point, frequency and calculation method should all be clear. A notice period only tells you when a change takes effect; it does not necessarily limit the size of that change.

Ask the franchisor to set out the calculation for both a quiet month and a busy month. The aim is not to forecast earnings, but to check that the payment mechanism works as you understand it.

4. Make sure you can verify the calculation before signing

Denmark has no franchise-specific legislation, no dedicated mandatory franchise disclosure document and no separate registration requirement for franchise agreements. The Danish Contracts Act and general principles of contract law are central. Other legislation, including the Danish Competition Act and Marketing Practices Act, may also be relevant, while the Danish Interest Act matters in cases of late payment.

There is no statutory standard royalty rate. Payment terms are generally determined by the agreement, within the wider legal framework. However, the absence of specific disclosure rules does not mean that material financial information can simply be concealed; general duties of good faith and disclosure may apply.

Have your accountant check a sample settlement statement and your lawyer review the payment clause. Also agree on access to the calculation data, a procedure for raising objections and how subsequent corrections will be handled. A return made in a later month must not fall through the gap between two settlements.

Practical takeaway: Only sign once you can calculate the royalties yourself for a standard sale, a discounted sale and a return. It is the calculation rule — not the percentage alone — that determines what you pay.