Franchising in Denmark: Define the Basis for Your Franchise Fee

A percentage-based franchise fee is only transparent if both parties understand the amount to which the percentage applies. When preparing your existing business for a franchise network, you should therefore define the calculation basis before setting the final rate. Otherwise, you and your franchisee could calculate different fees on the same sale.

1. Choose a basis your business records can support

Start by deciding what the ongoing franchise fee will be calculated on. This could be turnover or a precisely defined measure of profit, for example. These models require different supporting records and have different financial implications.

A turnover-based calculation depends primarily on which sales and deductions are included. A profit-based calculation also requires precise rules on costs, owners’ remuneration, depreciation and internal payments. The word ‘profit’ is therefore not a sufficient definition on its own.

For an existing business, the first step is to take actual transactions from your accounting records. Check whether your systems can produce the figures needed for your chosen calculation without relying on manual estimates each month.

At the same time, decide whether any minimum fee replaces the percentage-based fee when the minimum is higher, or is charged on top. These are two different models and must not be hidden behind the same wording.

Write a short calculation guide: What activity triggers the fee, what amount is used, and which records substantiate that amount? Keep the calculation separate from payment deadlines and invoicing arrangements.

2. Define turnover using real sales scenarios

If you choose turnover as the basis, the agreement needs to say more than simply ‘a percentage of turnover’. Address the situations your business already encounters:

• VAT: State explicitly whether the calculation excludes VAT. Address VAT on the franchise fee itself separately, in accordance with the applicable VAT rules.
• Discounts: Will the fee be calculated on the actual selling price after discounts, and how will discounts funded by third parties be treated?
• Returns and credit notes: When do these reduce the calculation basis, and how will a reversal in a later period be handled?
• Gift cards and advance payments: Which event triggers inclusion, so that the same amount is not counted both when payment is received and when the gift card or advance payment is used?
• Delivery charges: Is the customer’s delivery payment included, even if some or all of it is passed on to a carrier?
• Third-party platforms: Is the fee calculated on sales before the platform’s commission, or on the net amount paid out?

The last point is easily overlooked. A platform’s payout may have been reduced by commission and other charges. It is therefore not necessarily the same as the turnover figure the parties intend to use.

Also clarify sales between units and centrally placed orders fulfilled by a local unit. Decide which unit each sale is attributed to for fee calculation purposes, without changing who legally sells to the customer. The aim is an unambiguous allocation, not accidentally counting the same sale more than once.

3. Include the definition in the franchise agreement

Denmark has no dedicated franchise legislation and no separate public registration system for franchise agreements. Nor is there a franchise-specific statutory requirement to provide a prescribed disclosure document before signing.

Franchise agreements are, however, subject to the Danish Contracts Act and general principles of contract law. Section 36 of the Contracts Act allows unreasonable agreements or terms to be amended or set aside. Other legislation, including the Danish Marketing Practices Act and competition rules, may also affect the franchise relationship. Bookkeeping and VAT requirements must be addressed alongside the agreed fee calculation.

There is therefore no statutory Danish standard definition that automatically supplies your calculation basis. Include the definition and any significant exceptions in the agreement or a clearly identified schedule to it. Do not let vague wording in the operations manual be the sole basis for a core financial obligation.

The absence of a mandatory disclosure document does not remove the general duty to disclose material information in good faith. Prospective franchisees should be able to understand the fee’s actual impact before signing. Show the calculation alongside any minimum amounts and separate fees. Ask a legal adviser to check that your supporting materials and agreement describe the same model.

4. Test the calculation against your existing accounting records

Before offering the agreement, run a trial calculation for a completed trading period. Ideally, choose a period that includes ordinary sales, discounts, returns and sales through different channels.

Have two people calculate the fee independently, using the proposed agreement wording and the same supporting records. If their results differ, the definition or underlying data is not yet clear enough.

Next, prepare a simple reconciliation from recorded turnover to the fee calculation basis. Each adjustment should have an explanation and supporting documentation. Agree how errors will be corrected in a subsequent statement, so that corrections do not become hidden changes to the model.

Use the trial calculation to assess the implications for both parties. A fee charged on sales before platform commission, for example, may affect the franchisee’s profitability differently from a fee charged on the net payout. The choice should be deliberate and clearly reflected in the budget.

Practical next step: Write a one-page definition of the fee calculation basis and test it against actual transactions. Only offer the model once both you and an independent reader can arrive at the same amount.