Franchise turnover reporting: what should the fee be based on?

If you are turning an existing business into a franchise network, setting the percentage for a turnover-based fee is not enough to create a workable reporting and payment process. It is equally important to define exactly which revenues it applies to, when they count and what records support them. Before your first franchisee joins, establish rules that the store manager, accountant and franchisor all interpret in the same way.

1. Define the fee base explicitly

Members of a franchise network are legally and financially independent businesses. The internal turnover report used in the franchisor’s own outlets does not therefore automatically become the basis for a franchisee’s payment obligations. That requires a clear contractual definition.

The phrase ‘a fee payable on monthly turnover’ is too broad. It does not establish whether you mean the VAT-inclusive selling price, sales excluding VAT, money actually received or a particular accounting category. These amounts may differ, as may the periods in which they are recorded.

First decide how the fee base will work, then specify the data source. Set out at least:

• which product and service sales are included;
• how VAT, discounts and refunds are treated;
• which event determines the reporting period;
• how the franchisee’s revenue from activities outside the franchise is kept separate;
• what rules apply to subsequent adjustments.

Hungary has no standalone, comprehensive franchise act, but Act V of 2013, the Civil Code, specifically recognises franchise agreements. The general rules governing contracts also apply. Each business must comply with the accounting and tax rules applicable to it; the contractual definition of the fee base does not override those obligations. A lawyer and an accountant should therefore review the reporting and calculation schedule together.

2. Set rules for sales that could lead to disputes

Exceptions reveal more than ordinary trading days. Review actual sales scenarios from your own business and describe how each would be reflected in a franchisee’s fee base.

Discounts and coupons. Distinguish between a discount funded by the franchisee and one reimbursed by head office or another party. If the customer pays less but the franchisee receives compensation, you must specify how that compensation is treated too. Leave no uncertainty about when the reimbursement enters the calculation or how it is classified.

Returns and refunds. Specify which period’s fee base is reduced when a payment is refunded later. The original transaction and the supporting adjustment document should be identifiable. The same refund must not reduce the fee base twice.

Gift cards and advance payments. Decide whether the fee base is determined by receipt of payment or by redemption or fulfilment. This is a matter for the contractual calculation rules, which must also be aligned with the tax treatment of the particular arrangement. Avoiding double counting of the same value is especially important.

Intermediary platforms. The platform’s commission may already have been deducted from the amount paid into the bank account. It therefore matters whether the fee base reflects the amount paid by the customer or the payout after deductions. Any difference between the intermediary’s settlement statement and the sales data should be explainable through supporting records.

3. Assign each revenue stream to an outlet and a data source

Where there are several sales channels, knowing how much revenue was generated is not enough. You must also establish which franchisee’s calculation it belongs in. For example, an order placed through a central online shop and fulfilled locally raises separate questions about who the seller is, which outlet fulfils the order and what payment is due to the franchisee.

Create a simple allocation table. For each type of sale, list the selling business, the outlet fulfilling the order, the amount included in the fee base, when it is included and the supporting data source. The table should help put the contract into practice, not replace it.

Designate a primary data source, such as a report from a properly configured sales system. Link it to the invoicing, till and platform data needed for reconciliation. A bank statement alone will not usually explain every timing difference or deduction.

Do not automatically request the full customer database for verification. In many cases, an aggregated report and transaction identifiers containing no personal data will be sufficient. If personal data must be shared, the purpose, lawful basis and scope of that sharing need to be addressed separately.

4. Test the month-end process before your first franchisee joins

Use data from your own outlet to prepare a trial fee calculation as though the business were already being run by an independent franchisee. The aim is not to rethink the fee rate, but to check that everyone involved arrives at the same result from the same data.

Assign clear responsibility for preparing, checking and approving the monthly data. Set deadlines for submitting data, raising queries, invoicing and payment. Agree in advance how to handle missing data, system failures or late settlement statements from platforms.

Define the scope of verification rights in the contract: which records may be requested, who may access them and how any discrepancies will be handled. Keep the error-correction process separate from the consequences of a contractual breach; a correctable data discrepancy does not necessarily indicate deliberate under-reporting.

Practical takeaway: before signing the first agreement, prepare a definition of the fee base, a list of exceptions and a sample month-end calculation. Your reporting and calculation rules are ready when the franchisee’s accountant can reproduce the fee payable without a verbal explanation.