Franchise royalties: what is included in the calculation?

When joining a franchise network, it is easy to compare two offers by looking at the percentage charged as an ongoing fee. Yet the same rate can result in different amounts payable, depending on what the agreement defines as turnover. Before investing, therefore, do not just ask what the royalty rate is: establish exactly which transactions are included, which period they relate to and what adjustments apply.

1. Ask for a clear calculation base alongside the percentage

A turnover-based fee, often called a royalty, may be charged periodically for participation in a franchise system. There is no single calculation base that applies to every franchise relationship in Hungary. To understand the amount payable, you need to read the agreement’s fee provisions together with its fee calculation and reporting schedule.

Terms such as ‘monthly turnover’ or ‘total revenue’ are not sufficiently clear on their own. Ask at least the following questions:

• Is the calculation based on an amount excluding or including VAT?
• Is a sale counted when it is completed, when the invoice is issued or when payment is received?
• Does the calculation include only sales from the franchise operation, or other business income as well?
• Are delivery charges, services supplied through an intermediary or any recharged items included?
• How are advance payments and subsequent final invoices treated to ensure that the same transaction is not counted twice?

The royalty calculation base and the VAT treatment of the royalty invoice are two separate issues. Even if the royalty is calculated on turnover excluding VAT, the invoice for the royalty itself may still require a separate tax assessment. Clarify this with an accountant, particularly if the other party to the agreement is based abroad.

Also ask whether there is a minimum fee, and whether separate system access fees or marketing contributions apply alongside the turnover-based royalty. Show these as separate lines in your comparison: a lower percentage does not necessarily mean a lower overall cost.

2. Clarify discounts and sales through intermediaries

The amount charged to the customer often differs from the money that reaches your bank account. An ordering platform, for example, may deduct its own commission before transferring the payment to you. This does not automatically mean that the franchise royalty should also be calculated on the reduced amount.

Ask for a specific rule covering orders placed through intermediaries. It should be clear whether the calculation is based on the amount paid by the customer or the amount remaining after the intermediary’s deduction, and which statement provides evidence of that figure. If the full customer payment is used, both the intermediary’s fee and the franchise royalty apply to the transaction; reflect this in your own cost projections.

Promotions are just as important. Clarify how locally offered discounts, centrally issued coupons and loyalty point redemptions affect the royalty calculation base. If the franchisor or another partner reimburses you for part of a discount, the treatment of that reimbursement must also be documented. Do not leave it unclear whether this reimbursement is added to the amount paid by the customer.

For gift cards and vouchers, timing is particularly important: does the royalty become payable when the card or voucher is sold, when it is redeemed or at another specified point? Ask for a worked example covering the entire process. The aim is to avoid charging royalties twice on the same value and to make sure the treatment of any unused balance is clear.

3. Set rules for refunds and corrections

Returns, invoice adjustments and customer refunds can occur after the monthly accounts have been closed. The agreement therefore needs to address not only the original royalty calculation but also subsequent adjustments.

Agree which supporting documents allow previously reported turnover to be reduced, and in which month’s royalty calculation the change will appear. A separate question is what happens if a customer does not pay: how do an outstanding receivable, late payment or a debt that later becomes irrecoverable affect the royalty? The answer varies between agreements.

The fee calculation and reporting schedule should include:

• reporting and payment deadlines;
• accepted supporting documents and data sources;
• the procedure for reporting and correcting errors;
• rules for refunding overpayments or crediting them against future amounts due;
• the treatment of adjustments arising after the final settlement.

If the till system, accounting records and central system show different figures, there should be an agreed reconciliation procedure. Document any disputed item, but do not assume that unilaterally withholding payment of the fee is a lawful solution.

4. Have a sample month calculated before signing

Hungary has no standalone, comprehensive franchise act, but franchise relationships are not unregulated. Act V of 2013, the Hungarian Civil Code, contains specific provisions on franchise agreements. General provisions on contracts, co-operation and the provision of information are also important. There is no generally mandatory US-style pre-contractual franchise disclosure document, so expressly request a detailed explanation of how the fees are calculated.

Prepare a sample month covering ordinary sales, coupons, orders through intermediaries, advance payments and refunds. Ask the franchisor to calculate the royalty for that month, and have your accountant check whether the result can be reproduced using the available data. Your solicitor should check that the agreement actually requires the same calculation.

It is worth attaching the approved example as a schedule to the agreement and clarifying how it relates to the written provisions. An explanation given during a presentation is no substitute for a clear contractual definition.

Practical takeaway: compare royalty percentages only after calculating the fees on the same sample turnover under the rules of both offers. Base your decision on the actual amount payable and a calculation and reporting process that you can verify.