Buying a franchise: check how the ongoing fee is calculated

When you join a franchise network, you pay to use its business concept and benefit from working together. When assessing the ongoing franchise fee, however, what matters is not just the percentage but the amount to which it applies. An unclear calculation basis can increase your costs even when the sales income your business retains falls. Before buying a franchise, make sure you can calculate your future fee yourself using the agreement and your own sales report.

1. Establish what counts as sales for fee purposes

Suomi.fi, Finland’s public services portal, lists a turnover-based cooperation fee among the costs of franchising. However, each network’s agreement determines what the fee is called and how its calculation basis is defined. Labels such as franchise fee, cooperation fee and royalty do not, on their own, explain how the charge is calculated.

Ask for a precise definition of the calculation basis in the agreement. If it refers to turnover, establish whether this means turnover as recorded in the accounts or a separately defined sales figure. If the calculation basis differs from the accounting figure, those differences must be identifiable and quantifiable.

Work through at least these questions:

• Is the fee calculated on sales excluding or including VAT?
• Are customer discounts, returns and refunds deducted?
• How are cancelled sales and bad debts treated?
• Are delivery charges and other amounts charged to customers included in the calculation basis?
• How are sales to business customers and online orders included?

Do not settle for an assurance that the system calculates everything automatically. The system settings must implement the agreed terms, not replace the definition in the agreement. Also ask which report shows each item used in the calculation.

2. Test the calculation with non-standard sales transactions

Ordinary till sales will not reveal every possible difference in interpretation. Ask the franchisor for sample calculations, particularly for the sales channels you plan to use at your outlet. The aim here is to check the franchise fee, not to negotiate when customer payments will be transferred to you.

For example, where a sale is made through a third-party ordering platform, the price paid by the customer may differ from the amount your business receives because of the platform’s commission. Establish whether the franchise fee is calculated on the full sale value or the amount after commission. Do not assume either approach applies without checking the agreement.

For gift cards, ask whether the fee becomes payable when the card is sold or when it is redeemed. If a card is bought at one outlet and redeemed at another, the calculation rules must specify which franchisee’s fee calculation includes the transaction. The aim is to prevent the same sale from being counted twice without justification.

Also test what happens across month-end: what if a sale is recorded in one month but the customer returns the product the following month? Ask for a written example showing when the adjustment is reflected in the franchise fee. This will also help you check whether billing in practice matches the agreement.

3. Identify minimum fees and other terms that affect the calculation

A turnover-based fee does not necessarily move entirely in line with sales. The agreement may include a minimum fee, a fixed base fee or a tiered structure. Establish whether the minimum fee replaces the percentage-based fee when the latter would be lower, or whether separate charges apply alongside one another.

With a tiered structure, check whether a new percentage applies to all sales or only to the portion above the threshold. Also ask whether the threshold is assessed monthly, by calendar year or by contract year. Otherwise, the same verbal description could produce very different bills.

Using the calculation method confirmed by the franchisor, prepare three scenarios: a slow start, normal trading and a strong sales period. For each, show both the fee in euros and its proportion of the amount on which it is calculated. This makes the impact of a minimum fee clear, particularly in quieter months.

Also check when charging begins. Does the ongoing fee start from signing, initial training or the opening of the outlet? Agree how a partial first month will be treated. If the fee is adjusted by an index or another mechanism, ask for the calculation rule, review date and notification procedure in writing.

4. Agree on reporting and the correction of billing errors

To verify that a fee is correct, you need a sufficiently detailed breakdown. Ask for the invoice or an attachment to show the calculation period, the amount used as the calculation basis, the percentage applied, any minimum fee, and credits or other adjustments.

Agree which system will supply the figures and who will correct inaccurate source data. If the totals in the till system and the accounts differ, the agreement should help resolve the discrepancy rather than leave you relying on two conflicting reports.

Also record the procedure for disputing an invoice: who should receive the query, how quickly it will be dealt with and how an accepted correction will be credited. Do not assume that raising a query automatically extends the payment deadline or entitles you to withhold payment of the entire invoice. Ask for a clear contractual term covering these situations.

If you are buying an existing franchise business, compare the seller’s franchise fee invoices with the sales reports on which they are based. At the same time, establish whether the same fee terms will apply to you or whether you will be subject to a new fee schedule. The previous owner’s actual fees do not, on their own, establish your future costs.

5. Understand the respective roles of the agreement and Finnish law

Finland has no separate franchising act, mandatory registration system for franchise agreements or statutory standard pre-contractual disclosure document specifically for franchising. Fee terms therefore depend largely on the parties’ agreement, which is assessed under general legislation.

The Finnish Contracts Act, formally the Act on Legal Transactions in the Field of Property Law, contains rules on entering into contracts and adjusting unreasonable terms. Section 36 allows an unreasonable term to be adjusted or disregarded in certain circumstances. Nevertheless, buyers should not accept an unclear fee term in the hope of having it adjusted later.

The Unfair Business Practices Act prohibits, among other things, misleading statements in business. Competition law may also apply to the agreement as a whole. Consumer protection generally does not apply to a franchise agreement entered into for business purposes. The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation or a substitute for a precisely drafted fee clause.

Practical checklist: ask for the fee definition, a sample calculation and the adjustment procedure in writing. Sign only when you and your accountant can reproduce the calculation using the same source data.