Buying a franchise: understanding royalty fees

Joining a franchise network generally means paying ongoing royalty fees. When comparing two franchise brands, looking only at the advertised rate is not enough: the calculation basis, associated charges and payment schedule can make a significant difference to the bill. Before buying a franchise in France, make sure every financial clause can be translated into a calculation you can check and a clear payment schedule.

1. Establish exactly what you will be charged

A royalty fee may be a fixed amount, a percentage of turnover or a combination of different charging methods. The agreement should make its amount, due dates and calculation method clear. Do not assume it is based on profits: a fee calculated on turnover may still be payable even when your outlet is making a loss.

The first thing to check is the calculation basis: the amount to which the rate applies. If the agreement refers to turnover excluding VAT, ask how the following are treated:

• discounts, refunds, cancellations and credit notes;
• sales that have been invoiced but not yet paid for;
• orders placed on the franchise brand’s website and allocated to your outlet;
• sales through a platform that charges commission;
• gift cards, particularly where they are sold and redeemed at different outlets.

These questions help prevent double counting or discrepancies between your accounts and the franchisor’s. Ask for a sample statement covering the transactions typical of your business. The agreed rules must appear in the contractual documents, not just in a sales presentation.

2. Identify minimum payments and additional charges

An apparently modest rate may come with a monthly or annual minimum payment. In that case, costs will not necessarily fall in line with sales. Clarify whether the minimum replaces the percentage-based fee when it is higher, or is charged on top of it: the financial implications are very different.

Also check when charging begins. Is it on signing, when you gain access to the systems, when training starts or when the outlet actually opens? If opening is delayed, do not assume that payments will automatically be postponed. Any temporary royalty-free period must be set out in writing, including its duration and conditions.

Next, draw up a table of recurring charges: operating royalties, advertising contributions, IT subscriptions, licences and other compulsory services. The aim is not to lump these items together, but to establish the total cost imposed by the agreement.

For each item, record who receives the payment, the amount excluding VAT, how often it is payable and how it may change. If index-linked increases are provided for, identify the index, reference date and formula. A simple reference to the ‘current rate’ warrants an explanation of how that rate can change and how you will be notified.

3. Model several trading scenarios

Ask your accountant to incorporate the contractual provisions into your financial forecast, rather than simply applying the main rate to annual sales. Monthly calculations will highlight minimum payments, adjustments and timing differences between invoicing and receiving payment.

Test three scenarios: expected trading levels, a slower start and seasonal trading. For each, calculate total royalties and compulsory charges, then measure them as a proportion of turnover. This comparison will reveal, in particular, the impact of fixed fees during quieter months.

Also examine the practical arrangements:

• when must sales reports be submitted?
• what supporting documents must accompany them?
• how are errors corrected?
• when is any annual adjustment made?
• what checks or audits are предусмотрed, and who pays for them?

Ask for a sample invoice, based on a representative month for your proposed business. Compare it with your own calculation. An unexplained difference before signing could become a recurring dispute after opening.

4. Clarify the rules before committing

In France, pre-contractual disclosure is governed in particular by Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law of 31 December 1989, and Article R. 330-1. Where the legal conditions are met — making a trade name, trademark or trading identity available in return for an exclusive or near-exclusive commitment in carrying on the business — the pre-contractual disclosure document (known as the DIP) and draft agreement must be provided at least twenty days before signing or making any advance payment.

This framework does not set a statutory royalty rate. You therefore need to examine the proposed financial terms and have a lawyer review any ambiguous clauses. The statutory waiting period does not mean that the terms have been confirmed as commercially balanced.

Have any negotiated clarifications put in writing and check that they are consistent with the fee schedules attached to the agreement. Nor should you assume that you automatically have the right to suspend payments if you consider a service inadequate: any dispute requires a separate legal assessment.

Key takeaway: before signing, obtain a precise calculation basis, a sample invoice and a complete payment schedule. You should be able to calculate for yourself what you will owe.