How to Set Franchise Fees and Royalties in Guatemala

Pricing a franchise is not simply a matter of copying another brand’s percentage. For a Guatemalan business looking to grow through franchising, every charge should correspond to a specific right or service and allow both parties to run a viable operation. This guide explains how to develop and document that financial structure before presenting it to prospective franchisees.

1. Separate the initial franchise fee from the opening investment

The initial franchise fee pays for the agreed rights and onboarding services. It does not automatically cover the entire investment needed to open the outlet.

Before setting it, list the activities involved in bringing a franchisee on board: site assessment, initial training, opening assistance and setting up business tools, for example. Calculate the working hours, travel and external resources these require. Distinguish the costs for each outlet from the costs of developing the franchise programme, which you will need to recover without relying on unrealistic franchise sales forecasts.

Then organise the budget into three categories:

• Included in the fee: expressly identified services and rights.
• Paid separately: premises fit-out, equipment, stock, deposits and permits, as applicable.
• Working capital: funds to sustain the operation while revenue stabilises.

Also specify who receives each payment. A furniture purchase from a supplier should not be confused with income for the franchisor. This distinction makes it possible to compare the offer with the funds the prospective franchisee will actually need.

2. Calculate royalties from both sides of the business

Royalties should fund the agreed ongoing services and contribute to the franchisor’s financial sustainability. To calculate them, estimate the cost of support, visits, quality monitoring, maintaining business tools and administering the franchise network.

Next, check how much an individual outlet can afford. Start with verifiable results from your existing business and prepare scenarios that vary sales, rent, payroll, supplies and other costs. Include reasonable remuneration for the person managing the outlet: an outlet that only appears profitable because its owner works without pay gives a misleading picture.

You can assess several mechanisms:

• Percentage of sales: moves in line with sales volume, but does not guarantee profitability.
• Fixed periodic fee: makes forecasting easier, but can become a heavier burden when sales fall.
• Combined structure: requires a careful explanation of minimum payments, variable components and possible adjustments.

Do not present any option as universally superior. Choose the one you can justify against the services promised and the outlet’s financial performance. Also check that you can deliver the promised support if expansion is slower than expected.

3. Define the calculation basis unambiguously

Writing ‘royalty on sales’ is not enough. The contract must specify what that figure includes and how it is verified.

Clarify the treatment of VAT (known locally as IVA), discounts, returns, cancellations, credit sales and transactions through delivery platforms. For example, if a platform deducts its commission before transferring the money, specify whether the royalty is calculated on the sale to the customer or the amount received. The difference should not come to light when the first charge is issued.

Also document:

• The calculation period and payment date.
• The reporting process and system used to verify sales.
• The procedure for correcting discrepancies.
• The currency, bank charges and conversion rules, where applicable.
• The consequences of late payment and the mechanism for reviewing fees.

Ask a Guatemalan accountant to review invoicing, VAT and any withholding taxes, taking into account the nature of the payments and the parties’ tax residence. Avoid promising identical tax treatment in every case.

4. Distinguish advertising contributions from other recurring charges

If there will be an advertising contribution, keep it separate from the royalty. Explain which campaigns it funds, who manages the money, how its use is reported and what happens to unspent balances. Also specify whether the franchisee must undertake additional local advertising.

Review other potential charges, such as software, additional training, renewal, transfer or exceptional assistance. For each one, state what triggers the charge, its amount or calculation formula, and the conditions under which it may change.

Avoid funding ongoing services solely through new initial franchise fees. Support for existing outlets needs a sustainable recurring source of income, rather than relying exclusively on recruiting new franchisees.

5. Incorporate the financial structure into the Guatemalan contract

Guatemala does not have a comprehensive franchise-specific law or a general statutory regime requiring pre-contractual disclosure specifically for franchising. A franchise agreement is treated as a commercial contract without a specifically regulated contractual form. Relevant legislation includes the Commercial Code, the Civil Code on a supplementary basis, and the Industrial Property Law, Decree 57-2000, for the trade mark and its licensing.

The Guatemalan Franchise Association (Asociación Guatemalteca de Franquicias) requires documentation and ethical commitments for certain membership categories. These membership conditions should not be confused with generally applicable legal obligations.

Commission a legal review to ensure that the contract, budget and commercial offer are consistent. Specify when each payment becomes due, what happens if the outlet does not open and the circumstances in which a refund is available.

Practical conclusion: before recruiting prospective franchisees, prepare a table showing every charge, its purpose, calculation formula, due date and contractual treatment. If you cannot explain a fee clearly, it is not yet ready to be offered.