Franchise royalties: how to check the basis of calculation

Two franchise offers with the same royalty rate can still result in different monthly costs. The difference often lies not in the percentage, but in the calculation basis, minimum fees and treatment of adjustments. When joining a franchise network, do not settle for being told that you pay “on turnover”: before signing, ask for clear rules and a worked example that allow your own accountant to calculate the amount payable without ambiguity.

1. Clarify what turnover means in the agreement

An ongoing franchise royalty may be a fixed amount, a revenue-based fee or a combination of the two. With a revenue-based fee, the key question is: exactly which transactions are included in the calculation, at what value and in which period?

“Net turnover” is not a sufficiently precise definition on its own. It may mean sales excluding VAT, but that still does not tell you whether refunds, discounts or ordering platform commissions can be deducted. Nor is the amount reaching your bank account necessarily the same as the royalty base defined in the agreement.

Ask for specific answers to at least the following:

• Is VAT always excluded from the royalty base?
• Is the amount before or after discounts used?
• How are returns, cancellations and partial refunds treated?
• Are delivery charges, tips or recharged items included?
• When are advance payments, gift card sales and gift card redemptions recognised?
• Is a royalty also due on customer invoices that have not yet been paid?

Do not assume that a cost automatically reduces the royalty base. For example, if an intermediary platform deducts its own commission, the franchisor may still charge royalties on the sales amount before that deduction, if the agreement provides for this. Use a consistent basis when comparing offers, too.

2. Request a worked example covering a full month

Definitions are best tested against real operating scenarios. Ask for a sample royalty statement containing no personal data, then put together your own test month using the sales channels planned for your business. Do not include only straightforward sales: add discounted purchases, refunds, advance payments and orders placed through an intermediary.

For each transaction, record four details: the amount paid by the customer, the revenue recognised, the royalty base and the month in which it is reported. Add a brief explanation of any differences, along with the relevant clause in the agreement.

Timing is particularly important. If you have already paid the royalty on a sale but the customer later receives a refund, clarify which monthly statement will include the adjustment. For gift cards, check that the same amount is not unjustifiably counted twice, both when the card is sold and when it is redeemed.

Review the minimum royalty as a separate line item. Ask whether it is a floor for the percentage-based fee or an additional payment on top of it. Also clarify how it is calculated for part-months, the period before opening, temporary closures and seasonal operations.

The worked example should not replace the wording of the agreement. If you identify a discrepancy, correct the fee provisions first, then, where possible, attach the agreed example as a schedule to the agreement.

3. Set out the procedure for checks and disputes

Cooperation within a franchise network benefits from the franchisor being able to verify reported turnover and the franchisee being able to trace how an invoiced fee was calculated. A provision simply stating that the franchisor “may inspect records” is not enough.

The agreement should identify the primary data source: for example, reports from the point-of-sale system, invoicing software records or an agreed monthly report. It should also address what happens if these sources differ, who carries out the reconciliation and what supporting documentation is needed for an adjustment.

It is worth agreeing in advance on:

• deadlines for reports and invoices;
• data retention and accessibility;
• advance notice and the scope of checks;
• responsibility for the costs of an external auditor;
• how objections must be submitted and answered;
• refunds or credits for overpayments.

Where access involves personal data, GDPR requirements must also be addressed; checking royalty calculations does not automatically justify unrestricted access to all customer data. Check what interim procedure will keep reporting and calculations running if a system fails.

Do not automatically stop all payments because you dispute an invoice. Whether you may withhold payment, and the consequences of doing so, should be assessed with a lawyer in light of the agreement and the applicable law.

4. Understand the Hungarian legal framework and resolve outstanding points

Hungary has no standalone franchise act, but this does not mean that franchise agreements lack specific regulation. Act V of 2013, the Hungarian Civil Code, expressly recognises franchise agreements as a distinct contract type, and the general rules on contracts also apply. The details of fee payments therefore need to be carefully set out in the individual agreement.

There is no generally mandatory franchise-specific pre-contractual disclosure document or compulsory franchise registration. However, the Civil Code’s pre-contractual duties to cooperate and provide information are relevant. The European Code of Ethics for Franchising is a self-regulatory standard, not legislation; its significance should be assessed in light of the relevant membership obligations and contractual commitments.

Before signing, have an accountant check that the royalty base can be clearly interpreted for accounting purposes and review the tax treatment of invoicing. Ask a lawyer to review the provisions on fee changes, checks and disputes. Pay particular attention to whether the franchisor can unilaterally change the royalty base or rate, and under what conditions.

Practical takeaway: only treat an offer as comparable once you, your accountant and the franchisor all calculate the same royalty from the same test month.