Buying a franchise: how ongoing royalties are calculated

A low royalty rate does not necessarily mean a low cost. The actual cost depends on the calculation basis, minimum charges and payment timing. In franchising, a clear agreement on the franchisor’s fees helps protect the business relationship. Before choosing a brand, ask to see not just the percentage, but also how it translates into an actual monthly bill.

1. Define exactly what ‘turnover’ means

The phrase ‘royalties on sales’ leaves important questions unanswered. The agreement should define which amounts are included in the calculation and which are deducted. Do not assume that the accounting treatment of a transaction automatically determines the charge under the contract.

Ask for written answers to the following:

• Are royalties calculated before or after VAT is deducted?
• Are discounts, product returns and credit notes deducted?
• Are cancelled orders excluded, even if they initially appeared in the system?
• Are gift cards counted when sold or when redeemed, to avoid charging twice?
• Are sales through third-party platforms counted before or after those platforms’ commissions?
• Are delivery charges or other amounts collected on behalf of third parties included?

Take particular care if the business sells on credit. If royalties become payable when an invoice is issued rather than when payment is received, you may be paying royalties on revenue you have not yet collected. Also ask for clarification on how debts that ultimately remain unpaid are treated.

2. Look for minimum payments and additional charges

A percentage-based royalty may sit alongside a minimum monthly fee or a fixed charge. Check whether you pay the higher of the two amounts or whether the fixed charge is added to the percentage-based fee. These are different mechanisms, with different effects during quieter months.

Also check whether there are tiered rates based on sales. When a threshold is exceeded, does the new rate apply to all turnover or only to the amount above the threshold? Is the calculation made monthly, or is there an annual reconciliation? Unclear wording can lead to a dispute even when both parties agree on the sales figures.

Ask for a summary table of all recurring fees payable to the franchisor. Distinguish royalties from charges for software, administrative services or other support. For each amount, record the calculation basis, frequency, any VAT added and the contractual clause that provides for it.

Finally, clarify when charges begin: on signing, on gaining access to the systems or when the business opens. Ask what happens during a seasonal shutdown or temporary closure. Do not assume that having no sales means nothing is payable.

3. Agree a process for checking and correcting charges

Ask for an anonymised sample monthly statement or a worked example using hypothetical transactions. Your accountant should be able to reproduce the calculation using only the agreement and the sales data, without verbal explanations.

Ideally, the example should include a standard sale, a discount, a return relating to the previous month and a transaction through a platform. This allows you to check whether the mechanism works beyond the straightforward case of a sale paid for immediately.

The agreement should also answer these questions:

• Which system is the source of the data?
• When is the detailed statement provided, and when is payment due?
• How do you dispute a charge, and what supporting documents are required?
• When is an overcharge refunded or offset against future payments?
• Who can inspect your books, and who bears the cost?

Negotiate a reasonable period to check charges before payment is due. If payments are collected automatically, ask for advance notice of the amount. Set out separately how disputed amounts will be handled, so that an accounting disagreement is not automatically treated as a refusal to pay.

4. Relate the calculation to the Greek legal framework

Greece has no specific law regulating franchising as a distinct type of contract, nor any statutory royalty rate. There is also no specific mandatory pre-contractual disclosure document or dedicated register of franchise agreements.

The main rules that apply are the general provisions of the Greek Civil Code on contracts and obligations, including the principles of good faith and pre-contractual liability. Depending on the agreement, competition, intellectual and industrial property, tax and other relevant laws also apply. The absence of a specific franchise law does not mean there are no protections or obligations.

However, you should not rely on the law to resolve every unclear financial term in your favour. Ask a lawyer and an accountant to review the definition of revenue, the exclusions and the sample statement together. Incorporate any agreed clarifications into the contract or a binding annex.

Practical takeaway: before signing, work through a sample month yourself. If the calculation does not produce a single, verifiable amount, the clause needs clarification.