Franchising: making turnover reporting reliable

When you turn your business into a franchise, your sales reporting needs to work across several independent businesses. If royalties are based on turnover, an imprecise definition can lead to billing discrepancies and undermine trust. Here is how to set up a reporting process that is simple, verifiable and suited to your future franchise network.

1. Define exactly which sales must be reported

The royalty rate alone does not determine what a franchisee will have to pay. You also need to define the royalty base: the amount to which that rate applies. Simply stating ‘monthly turnover’ leaves several questions unanswered: whether the amount includes or excludes tax, whether it covers invoiced sales or payments received, and how refunds and commissions are treated.

Start with the transactions you actually encounter in your existing business. With your accountant, draw up a list of cases to resolve before drafting the relevant clause:

• sales at the counter, online and through third-party platforms;
• deposits, instalment payments and final balances;
• discounts, cancellations, credit notes and refunds;
• gift cards sold at one outlet and redeemed at another;
• services provided by a franchisee but invoiced by another entity.

For each case, specify who reports what, when and on the basis of which supporting document. A gift card must not result in the same sale being counted twice in the royalty base simply because of a default system setting.

Also distinguish between turnover recorded in the accounts and the contractual royalty base. Any adjustments used to calculate that base must be explicit and reconcilable with the accounts, without artificially altering the franchisee’s accounting records.

2. Set out the essential rules in the contract

In France, there is no single legal framework governing every aspect of a franchise agreement. The relationship is subject, among other things, to general contract law, commercial law and competition law. The definition of the royalty base and the reporting arrangements therefore need to be carefully set out in the contract.

Pre-contractual disclosure, however, is specifically regulated. Article L. 330-3 of the French Commercial Code, introduced by the law of 31 December 1989 known as the Doubin Law, applies where a business makes a trade name, trade mark or trading identity available while requiring exclusivity or near-exclusivity for the activity. In these circumstances, the pre-contractual disclosure document and draft agreement must be provided at least twenty days before signing or, where applicable, before any advance payment is made. Article R. 330-1 specifies what this disclosure must contain.

Prospective franchisees must therefore be able to understand the financial arrangements before committing. Include the royalty base, reporting frequency, submission deadline, supporting documents that may be required and correction procedure in the contract. A technical guide can explain how to use the software, but should not be used to change the calculation basis without making that change explicit.

Also provide for late or missing reports. Any provisional estimate must be subject to clear rules and subsequently reconciled with the actual figures. Have these provisions reviewed by a lawyer with franchising expertise.

3. Test the process in your existing business

Before asking your first franchisees to submit reports, replicate the proposed process in your own outlet. The aim is not simply to arrive at a total: you need to check that someone other than the business owner can produce an accurate report using the available tools.

Prepare a standard template covering the reporting period, the outlet concerned, sales by channel, adjustments and the final royalty base. Avoid free-form spreadsheets whose columns vary from one user to another.

Then test less routine situations: a refund after the reporting period has closed, an incorrect VAT rate, a sale recorded twice or a platform commission deducted from the bank payment. The amount received in the bank account is not necessarily the value of sales that must be reported.

Document every discrepancy between the till records, the accounts and the report. This test should produce instructions that others can follow, rather than a series of manual corrections known only to the founder.

4. Manage corrections without burdening the relationship

Assign responsibilities clearly: the franchisee approves their report, a named person within the franchisor’s business receives it, and discrepancies follow an established process. An acknowledgement of receipt helps distinguish a failure to submit from a technical problem.

Keep the original version and an audit trail of corrections. If an error results in an additional charge or a credit note, state the period concerned and the reason. Limit requests for supporting documents to what is needed to verify the royalty base; personally identifiable customer data is generally not needed for this calculation.

Key takeaway: before issuing your first royalty invoice, run a complete reporting cycle using your own sales. A clear royalty base, a standard form and traceable corrections can prevent many disagreements.