Franchise Fee Reporting: Define the Calculation Basis

When you turn an established business into a franchise network, setting a percentage for a turnover-based franchise fee is not enough to determine what to invoice. You need a shared definition of which sales the fee covers, which month each sale belongs to and how errors are corrected. A clear reporting model makes fees predictable and reduces the risk of the franchisor and franchisee interpreting the same transaction differently.

1. Set out the calculation basis before signing the agreement

Start with actual sales transactions from your existing business. Gather examples of ordinary purchases, advance payments, returns, discounts and any orders placed through intermediaries. Work with your accountant to establish how these are currently recorded. Your existing point-of-sale report may not, on its own, match the calculation basis for your future franchise fee.

Distinguish between accounting turnover and the fee basis defined in the agreement. If the fee is based on accounting turnover, state this precisely. If there are exceptions, specify them and use a consistent term for the calculation basis. A vague expression such as “all sales” leaves unnecessary room for interpretation.

When preparing the agreement, address at least the following questions:

• Is the fee calculated on sales excluding VAT?
• Do discounts given to customers reduce the fee basis?
• How are returns, credits and bad debts treated?
• Does the calculation include all sales made by the franchisee’s business, or only activities covered by the franchise concept?
• How are internal transactions between the franchisee and the network distinguished from customer sales?

For example, the amount paid out by a payment service provider or ordering platform may be lower than the sale price charged to the customer. If the provider deducts its commission before making the payment, the amount received in the bank account is not automatically the agreed fee basis. Set out the treatment in writing rather than leaving it to the person preparing invoices to decide each month.

2. Agree which period sales and adjustments belong to

The fee can vary significantly depending on whether reporting follows the order date, payment date or delivery of the goods or services. Choose a reporting principle suited to your concept with your accountant, and ensure that the franchisee’s systems can produce the necessary information. Contractual fee calculations do not alter statutory accounting or tax obligations.

Gift cards, prepaid services and customer contracts spanning several months need particular attention. The sale of a gift card and its later redemption must not both be counted towards the fee basis. If gift cards form part of your concept, also define how unused cards are treated. Their accounting and VAT treatment must be checked separately.

Prepare a short example for each common exception. If a customer returns a purchase made in the previous month, show whether the credit is deducted from the fee basis in the next report or whether the original report is corrected. At the same time, agree how any franchise fee already invoiced will be adjusted.

Keep a traceable audit trail of corrections. Avoid simply replacing the original report with a new file without explanation. Record the reason for the correction, the period concerned, who made it and its effect on invoicing. This allows both the franchisee and the franchisor to understand later why the invoice amount changed.

3. Build a simple but verifiable monthly routine

The purpose of reporting is not to collect every possible detail about the franchisee’s business. It should provide enough information to calculate and verify the agreed fee. Asking every franchisee for the same core information, using the same definitions, helps build trust across the network.

Create a reporting template showing the reporting period, included sales, agreed deductions, adjustments relating to earlier periods and the final fee basis. Show the applicable fee percentage and the calculated fee separately. Any VAT due on the fee should be handled on the invoice in accordance with the applicable tax rules.

Agree on practical responsibilities before issuing the first invoice:

• Who in the franchisee’s business submits and approves the report?
• What is the deadline for submitting the information?
• Who within the network checks exceptions and sends the invoice?
• How should missing information or an invoicing error be reported?
• Which summaries or supporting documents are needed to resolve queries?

Test the template using an actual month’s figures from your existing outlet. Ask someone else to calculate the fee using only the instructions and the report. If they need additional verbal explanations from the founder, the definitions or instructions still need refining.

Avoid transferring customers’ personal data as part of the fee calculation process if summary information is sufficient. Even when investigating an individual transaction, limit the information shared and access rights to what is necessary. Reporting procedures are easier to maintain when they do not rely on unnecessary copying of customer data.

4. Ensure the contractual framework complies with Finnish rules

Finland has no separate franchise act, statutory franchise agreement registration system or prescribed franchise disclosure document. This does not remove the obligation to act properly during contract negotiations. Material exclusions and limits affecting the fee basis should be explained to prospective franchisees before they commit, so that they can assess the true costs.

Applicable legislation includes Finland’s Contracts Act, under which an unreasonable contractual term may be adjusted. The Unfair Business Practices Act covers matters such as the use of false or misleading statements in business. The Competition Act and applicable EU competition rules also set limits on the arrangement. Reporting that includes personal data must also take account of the General Data Protection Regulation and Finland’s Data Protection Act.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not separate legislation. Its emphasis on transparency supports the practice of ensuring that franchisees understand how their fees are calculated before signing an agreement.

Record financially material calculation rules in the agreement or a binding schedule to it. The operations manual can describe the steps for submitting reports, but updates to it should not quietly change the agreed fee basis. Have the overall framework reviewed by a lawyer familiar with franchise agreements and by an accountant.

Practical checklist: define the fee basis, resolve exceptional transactions and test one reporting month before signing your first franchise agreement. In a sound model, both parties arrive at the same fee from the same information.