Buying a franchise: how ongoing royalties are calculated

A low royalty rate does not necessarily mean a low-cost franchise relationship. The actual cost depends on the amount to which the rate applies, any exclusions and when payment is due. In franchising, a clear agreement on these charges helps protect the relationship. Before choosing a franchise brand in Greece, ask to see not just the rate, but also a complete written explanation of how royalties are calculated.

1. Clarify exactly what “turnover” means

Ongoing royalties are the recurring payments a franchisee makes to the franchisor under the franchise agreement. They may be set as a percentage of sales, a fixed amount or a combination of the two. The crucial detail lies in how the calculation basis is defined.

The wording “a percentage of total turnover” leaves important questions unanswered. Ask your accountant to compare the contractual definition with how your business transactions are actually recorded. In particular, clarify in writing:

• Whether VAT is excluded from the calculation basis.
• How returns, cancellations, credit notes and discounts are treated.
• Whether sales through platforms are counted before or after the platforms’ commission.
• When gift cards, advance payments and loyalty scheme redemptions are counted.
• Whether sales that have been invoiced but not yet paid for are included.

For example, an order placed through a platform may generate royalties on the full sale value, while a smaller amount reaches your bank account after deductions. This is not necessarily an error, but you need to understand it and factor it into your costings.

Also check which outlet is credited with online orders fulfilled locally. The calculation basis should prevent the same transaction from being charged twice and allow you to reconcile the figures with your accounting records.

2. Identify charges that affect the actual cost

The headline rate is only one part of the agreement. Look for minimum monthly royalties, fixed fees, tiered rates and increases triggered when sales reach a particular level.

Distinguish between a minimum royalty and an additional fixed fee. In the first case, you may pay whichever is higher: the minimum amount or the percentage-based charge. In the second, you may pay both. The agreement must explain this without leaving room for different interpretations.

Also check whether a reduced charge applies during the initial trading period, when it ends and what happens during seasonal closures or temporary shutdowns. Do not assume that no sales automatically means nothing is payable: a contractual minimum may still be due.

For adjustments, ask for a specific mechanism covering the reference index, frequency, effective date and any cap. A general right to make changes “in accordance with network policy” warrants particular legal scrutiny.

To compare two offers, apply their terms to the same hypothetical sales levels. Calculate the total annual royalty payment, not just the advertised rate. Keep other contributions separate so that distinct contractual obligations are not confused.

3. Agree on the calculation, payment and checking process

Before signing, ask for a sample monthly royalty statement. It should show the sales used as the basis, deductions, the applicable rate, any minimum amount and the final calculation. An anonymised example can help without revealing another franchisee’s information.

The payment deadline matters in practice. If royalties are due before partner platforms transfer your sales proceeds, you will face a temporary cash-flow gap. Ask when the invoice is issued and whether payment is collected automatically from your bank account.

The agreement also needs a clear procedure for corrections. Who handles a return recorded in the following month? When is an overcharge credited? How long do you have to dispute a statement, and what supporting evidence is required?

If the agreement allows the franchisor to audit sales, examine the extent of access to your systems, confidentiality arrangements and who pays for the audit. Ask for proportionate terms to address any discrepancies, rather than automatically treating every accounting error as concealed revenue.

4. Put the clarifications into the agreement

Greece has no specific law providing a comprehensive framework for franchising, nor a dedicated mandatory pre-contractual disclosure system with a standardised document and a fixed disclosure period. Among the applicable provisions are the general rules of the Greek Civil Code: freedom of contract under Article 361, pre-contractual good faith and liability under Articles 197–198, performance in accordance with good faith under Article 288, and the prohibition on the abusive exercise of rights under Article 281.

The European Code of Ethics for Franchising provides for substantive written disclosure within a reasonable time before any commitment is made. It is a self-regulatory framework, not Greek law; whether it applies to the particular relationship must be assessed separately.

Do not, therefore, settle for a verbal assurance that “this is how we charge everyone”. Ask for the definition of sales, exclusions and adjustment mechanism to be incorporated into the agreement or a signed appendix, with a clear order of precedence between the documents.

Practical takeaway: before signing, ask an accountant and a lawyer to review the same sample royalty statement. If you cannot reproduce the calculation yourself, the agreement needs to be clearer.