How to Set Royalties When Franchising in Guatemala

A royalty should not be chosen simply because another brand charges a similar amount. When franchising an existing business in Guatemala, you need to check that the recurring payment can support the franchisor’s operations without making the franchisee’s business unviable. This balance helps build a lasting franchise network. The decision starts with the business’s figures and ends with a clearly worded contractual formula.

1. Calculate what an outlet can afford

Start with your business’s actual results, but recalculate its costs as though it were run by an independent operator. A company-owned outlet may appear more profitable because it does not pay market rent, shares staff with another business or benefits from the founder’s work without recording any remuneration.

Prepare a profit and loss statement that includes goods or supplies, payroll, rent, utilities, maintenance, administration and remuneration for whoever runs the outlet. Also include any recurring payments you will require from the franchisee, such as software fees and advertising contributions, even if they are not part of the royalty.

Assess the royalty alongside all the costs imposed by the franchise model, not in isolation. A seemingly modest percentage can become excessive when combined with expensive compulsory purchases and other charges.

Build three scenarios: below-forecast sales, expected trading and higher activity. For each one, check:

• How much operating profit remains after paying the royalty.
• Whether there is enough cash to replenish stock and meet obligations.
• The impact of months with lower demand.
• Whether the outlet can fund maintenance and asset replacement.

Do not confuse accounting profit with available cash or present these scenarios as guaranteed returns. Their purpose is to identify weaknesses before you offer the franchise.

2. Estimate the franchisor’s recurring costs

The other half of the calculation concerns your own organisation. List the resources needed to maintain the system: support staff, travel, updates to procedures, technology tools and quality monitoring. Separate initial onboarding costs from those that continue throughout the relationship.

Next, distinguish between shared costs and costs that increase with each outlet. One platform may serve several locations, whereas an in-person visit requires additional time and transport. This distinction helps you understand how the budget will change as the network grows.

Run the calculation for both a small network and a larger one. Do not base a fee solely on the expectation of recruiting many outlets: the first ones will also need attention and resources.

Compare projected recurring revenue with these costs. If it falls short, review the support structure, the pace of expansion or the viability of the model. Fees from new openings should not be the routine means of funding ongoing obligations to existing franchisees.

3. Choose a formula and test its effects

In Guatemala, the parties can agree on a royalty calculated as a percentage of sales or a fixed fee, among other legally permissible structures. No single formula suits every business.

Percentage of sales. This moves in line with trading activity, but requires a precise definition of the calculation base. Clarify the treatment of VAT (known locally as IVA), returns, discounts and sales made through platforms. Avoid terms such as ‘net sales’ without explaining which deductions are allowed.

Fixed fee. This makes payments easier to predict, but places a heavier burden on an outlet when sales fall. Test it particularly carefully against quieter months and the start-up period.

Hybrid formula or minimum payment. This can cover some of the franchisor’s costs, but also shifts more risk onto the franchisee. A minimum payment is not justified simply because it guarantees revenue for the brand.

Test each alternative against the same scenarios. If you are considering a temporary reduction during the start-up period, specify its duration and conditions from the outset. Avoid relying on informally negotiated exceptions to make the figures work.

4. Turn the calculation into a clear obligation

Guatemala does not have a specific franchise law. A franchise agreement is treated as an ‘atypical commercial contract’: it is governed by the Commercial Code and, on a supplementary basis, by the Civil Code, within the legal limits of freedom of contract. The absence of specific regulation does not remove general obligations or allow the parties to agree to any condition without restriction.

Have the formula reviewed by legal and tax advisers. The agreement should state the amount or percentage, calculation base, payment frequency, currency, applicable taxes and any adjustment mechanism. It should also clarify which rights and services the royalty pays for and which incur separate charges.

Check that the commercial proposal, financial projections and agreement describe exactly the same payment. A formula that requires contradictory explanations is not yet ready.

Practical conclusion: before setting your royalty, prepare two linked budgets: one for an independently operated outlet and one for the franchisor. Approve the formula only when both are sustainable under prudent assumptions and the rules can be explained without ambiguity.