Buying a Franchise in Egypt: How Do You Define Sales Subject to Royalties?

When buying a franchise in Egypt, you may focus on the ongoing royalty rate and overlook the more important question: what amount is it calculated on? The same rate can produce two very different liabilities, depending on how sales are defined and which exclusions are allowed. In franchising, a clear agreement on the calculation basis helps protect cash flow and reduce disputes. Review the definition with an accountant and a lawyer rather than relying on the phrase ‘a percentage of gross sales’.

1. Separate the Rate from the Calculation Basis

An ongoing royalty is a payment the franchisee must make under the agreement, usually linked to continued use of the brand and operating system. It may be a fixed amount, a percentage of sales or a combination of both. Where it is a percentage, defining the calculation basis is just as important as setting the rate itself.

Ask the franchisor for a written formula covering the sales included, exclusions, accounting period and payment due date. Ask whether royalties are calculated when an invoice is issued, an order is delivered or payment is received. These events do not always occur on the same day, particularly with pre-orders and sales to businesses.

Also establish what counts as an outlet’s sales. Does this include website orders fulfilled by the outlet? What about an order taken by one outlet but prepared by another? The aim is to prevent the same transaction from being counted against more than one franchisee, not simply to list the sales channels.

2. Review Exclusions Item by Item

Do not assume that ‘net sales’ means the net amount reaching your bank account. The franchisor may mean sales less returns only, leaving you to bear payment processing and delivery commissions. Ask for explicit provisions covering the following:

• Value added tax (VAT): Are amounts collected from customers as VAT included in the royalty calculation or excluded? This concerns the contractual definition of the calculation basis; it does not replace the tax treatment required by law.
• Returns and cancellations: When is a cancelled or refunded transaction deducted? What supporting evidence is acceptable?
• Discounts: Is the calculation based on the advertised price or the price actually paid by the customer? How is a contribution from another party towards funding a discount treated?
• App and payment gateway commissions: Are these deducted before royalties are calculated, or do they remain costs you must bear? Do not assume they are automatically excluded.
• Delivery charges and tips: Distinguish between revenue belonging to the business and money collected and then passed on to another party.

Also ask how free samples and products supplied as compensation for a complaint are treated. If the franchisor assigns them a notional value, the basis for that valuation should be specified rather than left to a later judgement you cannot anticipate when budgeting.

3. Prevent Double Counting and Timing Mismatches

Prepaid gift vouchers are an important example: payment for a voucher may be collected in one month and the customer may use it in another. The agreement should explain when its value is recorded for royalty purposes and ensure it is not counted once on sale and again on redemption. Also clarify how unused balances and vouchers accepted at different outlets are handled.

Sales on credit need a similar agreement. If royalties become payable on invoicing, before you receive payment, you are funding them from your own cash flow. Ask about bad debts, whether the royalty calculation can be adjusted for them and what evidence is required. Treatment need not be identical across every brand, but it must be clear before you commit.

For returns made after that month’s royalty has been paid, ask for a mechanism to make the adjustment in the next statement, with a separate provision for cases where the agreement ends before the adjustment is made. Set a deadline for issuing a correction notice and showing the credit balance so that the deduction does not remain pending indefinitely.

4. Formalise the Definition within Egypt’s Legal Framework

Egypt has no standalone franchise law and no general franchise-specific regime requiring a standard disclosure document or registration of franchise offerings. Nor is there a general mandatory 14-day review period simply because the contract is a franchise agreement. The parties can agree on a suitable contractual period for due diligence.

The relationship is governed by general legal rules, including Civil Code No. 131 of 1948 and Commercial Law No. 17 of 1999, alongside other laws relevant to the subject matter, including Intellectual Property Rights Protection Law No. 82 of 2002 and tax legislation. If the agreement meets the criteria for a technology transfer contract, the Commercial Law’s specific provisions on such contracts may apply. This requires a legal assessment of the nature of the obligations.

In practice, do not assume there is a franchise-specific statutory definition that settles the royalty calculation basis for you. Include the definition, exclusions and correction mechanism in the agreement or a signed schedule, and specify how they may be amended by written agreement. Make the right to request calculation details and challenge errors clear, without assuming that a challenge automatically suspends payment.

5. Test the Schedule Before Signing

Ask for a sample royalty statement using a range of hypothetical transactions: a direct sale, an order through an app, a return relating to a previous month and a prepaid voucher. Ask your accountant and the franchisor to calculate the amount due independently. Different results often reveal ambiguity that needs to be resolved.

Then agree on a periodic statement template showing sales by channel, exclusions and their supporting documents, previous adjustments and the final royalty calculation basis. Set a deadline for reviewing the statement, a procedure for correcting errors and rules for handling overpayments.

Practical takeaway: Before comparing royalty rates between two brands, use a consistent definition of sales in your calculations. Do not sign until you can recalculate the amount due from your outlet’s records and understand how every cancelled or double-counted transaction will be corrected.