Franchise Fees: Clearly Define the Turnover Base

Turning an existing business into a franchise network involves more than setting the level of ongoing fees. It is just as important to decide what the agreed percentage applies to. Otherwise, vouchers, refunds and intermediary platforms can lead to different calculations. A precise definition of turnover gives both sides a clear, verifiable basis – before the first franchise outlet opens.

1. Explicitly define the turnover subject to fees

The phrase “ongoing fee based on net turnover” may seem clear, but it leaves practical questions unanswered. Does “net” simply mean excluding VAT? Are discounts, cancellations or platform commissions also deducted? Which date determines the billing month to which a transaction belongs?

Start by listing all revenue streams in your existing business. These might include on-site sales, services, online orders, deliveries and additional offerings. Then identify which should form part of the contractual fee base.

The turnover used to calculate fees must be defined in the contract. It should be possible to derive it reliably from the accounts, but it need not automatically match every turnover item recorded there. Any differences require explicit, understandable rules.

A working draft should answer at least the following questions:

• Which goods and services are included?
• Is VAT excluded from the calculation base?
• How do discounts and refunds affect the calculation?
• Is turnover recognised when the goods or services are supplied, when the invoice is issued or when payment is received?
• How are funds held on behalf of third parties and pass-through amounts treated?

Review this definition with tax and legal advisers. A tax accounting rule is no substitute for a clear fee agreement.

2. Test special cases against your actual business model

Use typical transactions from your business rather than relying solely on an abstract definition. Transactions where the sale, payment and supply take place at different times are particularly important.

Vouchers: Specify whether the fee arises when a voucher is issued or redeemed. Counting both events risks charging twice. If vouchers can be redeemed at different franchise outlets, you must also clarify which outlet is allocated the turnover subject to fees and how internal reimbursements are treated.

Platform sales: An intermediary platform will often transfer only the sales proceeds less its commission. Clarify whether the underlying customer sale or the amount paid out counts towards the fee base. A platform commission does not automatically reduce turnover for franchise fee purposes.

Cancellations and refunds: Decide whether adjustments alter the original billing month or are included in the next billing cycle. Partial refunds require the same clarity as transactions reversed in full.

Outstanding debts and bad debts: If the fee base is tied to invoices, fees may become payable before the customer has paid. State explicitly whether subsequent bad debts are taken into account and, if so, under what conditions.

Orders allocated centrally: Where head office accepts orders and a franchisee fulfils them, the identity of the customer's contracting party, the payment flow and the allocation of turnover must be consistent. Simply forwarding an order does not resolve these questions.

Document a worked calculation for each relevant case. These examples will also support training later on and help prevent differing interpretations across the franchise network.

3. Give the definition a firm contractual basis

Germany has no dedicated franchise law. Franchise agreements are governed in particular by the general provisions of the German Civil Code (BGB), the German Commercial Code (HGB) where applicable, and competition and antitrust law. There is no franchise-specific requirement to register the fee arrangement or obtain regulatory approval for it.

Standard-form franchise agreements are generally subject to the rules governing standard terms and conditions under sections 305 to 310 BGB. For fee clauses, the transparency requirement in section 307 BGB is particularly relevant: franchisees must be able to understand their payment obligations. Whether other aspects can also be reviewed for substantive fairness depends on the particular clause.

The commercially significant definition of turnover should therefore appear in the agreement itself or in a schedule clearly incorporated into it. A passing reference in the operations manual is not a robust contractual approach. Changes to the calculation base should not be treated as merely technical adjustments: they can change the actual fee burden.

The fee burden must also be explained accurately before the agreement is signed. General pre-contractual duties arise in particular under sections 311(2) and 241(2) BGB. Quoting only the percentage during discussions while omitting material features of the calculation base creates avoidable risks.

4. Run through the billing process before the first franchisee starts

Prepare a complete trial fee statement using data from your existing business. Simply multiplying a monthly total by the fee rate is not enough. The calculation must also show which items make up that total.

Define a fixed process covering the billing period, data submission, calculation, invoicing and payment due date. Add a practical correction procedure for late accounting entries or incorrectly allocated transactions. VAT on the franchise service must be considered separately from the turnover base.

Ask a second person to calculate the fee using only the proposed contractual documents and billing data. If they arrive at a different result, the rules are not yet ready to use. Also check whether your point-of-sale and accounting systems can provide the required breakdown without ongoing manual work.

Practical takeaway: Before signing your first franchise agreement, establish a clear definition of turnover, suitable rules for special cases and a sample fee statement that can be checked and understood. The fee base is only robust enough for day-to-day use when different people can use it to reach the same result.