Buying a franchise: check how ongoing fees are calculated

When you join a franchise network, you often commit to paying regular fees to the franchisor. A percentage alone does not reveal their true cost: what matters is the amount it is applied to, when the fee becomes payable and how errors are corrected. Before buying a franchise, examine how ongoing fees are calculated just as carefully as the percentage itself. This can help you avoid receiving an invoice that complies with the agreement but is much higher than you expected.

1. Define which sales count towards the fee

The phrase “fee based on turnover” may seem straightforward. In practice, however, the agreement may define the fee base differently from your business’s accounting records. Ask for a written definition and make sure your accounting systems can produce a report on that basis without constant manual work.

Clarify at least the following:

• Is the fee calculated on sales excluding or including VAT?
• Are returns, refunds and discounts given to customers deducted?
• Are delivery charges and other additional charges paid by customers included in the fee base?
• When are gift card sales counted, and how is the same sale prevented from being counted twice?
• How are bad debts and cancelled or unpaid orders treated?
• Does the fee base include sales outside the franchise concept?

Sales through third-party ordering and delivery services need particular attention. The amount paid by the customer may differ from the amount transferred to your business account because of the service provider’s commission. The agreement must make clear whether the franchise fee is calculated on sales before or after this deduction. You should not infer either approach from the bank statement alone.

Ask the franchisor to prepare sample calculations for a typical month and for a month that includes returns, gift cards and sales through an intermediary platform. Compare these calculations with the wording of the agreement. If they conflict, have the wording corrected before signing: an explanation given at a presentation does not, on its own, remove the risk of differing interpretations.

2. Put all recurring fees in one table

The ongoing franchise fee may not be your only regular franchise cost. Separate charges may apply to shared marketing, appointment booking, the point-of-sale system, software licences or centralised customer service, for example. The aim is not to judge these fees by their names, but to establish what triggers the obligation to pay each one.

Create a fee table with a row for each charge, showing the recipient, calculation basis, billing frequency, due date and any minimum amount. Also note which agreement or schedule contains the charge. This makes it easier to spot both overlapping charges and compulsory services billed by an external supplier rather than the franchisor.

Pay particular attention to how any minimum fee relates to the percentage-based fee. Is the monthly charge the higher of the two, or is a fixed fee charged in addition to the percentage? Also establish whether the minimum applies per outlet, per company or across all of your franchise agreements. The difference becomes especially important if you later open a second outlet.

Ask whether fees apply before opening, during seasonal closures or during a temporary suspension of operations. A fee triggered by the creation of system login details may start at a different time from the business itself. Record the agreed start point in the agreement in a way that can be verified later.

For shared marketing fees, establish whether the payment is final or an advance that will later be reconciled against actual costs. Ask for a description of the reporting arrangements and how any surplus or shortfall is handled. Do not assume that unused funds will be returned to you unless the agreement provides for this.

3. Agree how invoices will be checked and corrected

A clear calculation basis is useful only if you can check that it has been applied correctly. Ask to see a sample invoice and its supporting report. The invoice or an attachment should show the billing period, the fee base used, the percentage, fixed charges and adjustments relating to earlier periods.

Agree which system will supply the billing data and which party is responsible for providing it. If the franchisor receives sales data directly from the point-of-sale system, make sure you have access to the same reports. A total charge alone is not enough to investigate discrepancies.

Also document the procedure for dealing with errors:

1. Who should receive an invoice query or dispute?
2. What are the deadlines for raising and responding to it?
3. How will a credit appear on the next invoice, or how will a refund be paid?
4. How will the disputed and undisputed portions of the invoice be handled while the matter is being investigated?

Do not assume that disputing an invoice automatically extends its due date or entitles you to withhold payment. Agree the procedure in advance. At the same time, check the franchisor’s right to audit your sales data: the scope of the audit, confidentiality requirements and allocation of costs can affect how burdensome billing checks are for your business.

4. Understand the Finnish legal framework

Finland has no specific franchising law, no statutory franchise disclosure document and no special registration requirement for franchise agreements. The agreement and general legal rules are central to assessing fee terms. Nevertheless, general contractual duties of loyalty and disclosure must be taken into account during negotiations.

The Finnish Contracts Act governs matters including the validity of agreements, and section 36 allows an unreasonable contractual term to be adjusted or set aside. This does not mean, however, that an unfavourable payment term between businesses will automatically be removed. The Finnish Unfair Business Practices Act also prohibits, among other things, false or misleading statements that may affect demand for or supply of a product or service, or harm another business.

Franchise industry codes of ethics can supplement good business practice, but they are not legislation. Establish which codes the franchisor has committed to and how they relate to your agreement. A franchise agreement entered into as a business owner is generally not a consumer contract.

Practical checklist: do not agree to a fee percentage alone. Agree only once the fee base, all compulsory charges, billing dates and correction procedure are set out clearly in writing and can be checked.