Buying a Franchise: Clarify How Royalties Are Calculated

A seemingly low royalty rate can become a substantial cost if it applies to too broad a sales base. Before entering Indonesia’s franchise market, prospective franchisees need to understand not just the rate, but also which transactions attract royalties and when the obligation arises. This guide helps you check the royalty formula so you can verify invoices rather than simply accept them without explanation.

1. Distinguish the royalty rate from the calculation base

Asking “what is the royalty percentage?” is only the start. The next question is “what figure is that percentage applied to?” Terms such as turnover, gross sales and net revenue can be interpreted differently if the contract does not define them.

Ask the franchisor to set out the full formula in writing, with a sample invoice. Establish whether the royalty is a percentage of sales, a fixed amount, a monthly minimum or a combination of these. If there is a monthly minimum, ask whether it replaces the percentage-based amount when the minimum is higher, or is added as a separate charge.

For illustration only, rather than as a market benchmark, a 5% royalty on a sales base of Rp100 million produces a bill of Rp5 million. However, if the contract sets a minimum of Rp7 million, you may still owe Rp7 million even though the percentage calculation gives a lower figure. Your business budget must account for this difference.

Also check when royalties start to apply: when the contract is signed, when the outlet opens or when the first transaction takes place. The treatment of the pre-opening period, when there are no sales, should not be left unclear.

2. Trace the transactions that affect sales figures

Ask for an anonymised outlet sales report, then compare it with a sample royalty invoice. The aim is not to assess another outlet’s profitability, but to ensure that each component has a clearly defined treatment.

Use the following checklist in your discussions:

• Taxes collected from customers: are these excluded from the royalty base or included?
• Outlet discounts: are royalties calculated before or after discounts funded by you?
• Promotional subsidies from other parties: how are reimbursements for discounts funded by the franchisor or an app recorded?
• Cancellations and refunds: when are these sales deducted from the calculation base?
• Delivery app commissions: are royalties based on the value of the customer’s order or the amount received after commission?
• Vouchers and advance payments: do royalties become payable when payment is received or when the product is supplied?

There is no single commercial approach that automatically suits every brand. What matters is that the answers are consistent and documented. For example, net receipts from an app are not necessarily the same as sales, because commission has already been deducted. Do not assume that this deduction reduces the royalty base unless the contract says so.

For vouchers, make sure the transaction is not counted twice: once when the voucher is sold and again when it is redeemed. For refunds issued in a later month, agree how a credit will be applied to the next invoice and what supporting evidence is required.

3. Put the formula and verification rights in the contract

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. It covers franchise offering prospectuses, franchise agreements and registration through the Franchise Registration Certificate, known locally as the Surat Tanda Pendaftaran Waralaba, or STPW.

A franchise agreement must include, among other things, the parties’ rights and obligations and the procedures for paying fees. The royalty formula should therefore not remain merely part of a conversation with a sales representative. Include its definitions and calculation process in the agreement or in an annex expressly designated as an integral part of it.

The regulation does not set government-approved royalty rates. You still need to scrutinise the figures and calculation base in your own agreement. The existence of an STPW is also no substitute for reviewing whether the payment formula is reasonable.

Propose that the documents cover:

1. The sales data sources to be used and which takes precedence if figures differ.
2. The calculation period, invoice issue date and payment due date.
3. The franchisee’s right to receive a breakdown and download supporting data.
4. The deadline for raising objections and the procedure for correcting invoices.
5. The process for changing either the rate or the definition of the royalty base.

Watch out for clauses allowing the franchisor to change the royalty base unilaterally through an operating manual. A change in definition can increase your bill even if the percentage stays the same. Ask for changes to key financial terms to require written agreement. The verification and correction rights you propose must be expressly included in the contract, rather than assumed to exist automatically.

4. Test a billing cycle before agreeing

Create a simple spreadsheet showing sales, permitted exclusions, the royalty base, the rate, any minimum and the resulting bill. Test several scenarios: a normal month, a month with heavy discounting and a month with substantial refunds.

Ask the franchisor to calculate the same scenarios independently. If the results differ, resolve any differences in definitions before signing. Involve an accountant to check the tax treatment of royalty payments, including any withholding obligations that may apply depending on the parties’ status. Distinguish taxes on customer transactions from taxes on royalty payments.

Finally, agree how disputed amounts will be handled: how objections are submitted, who reviews them and how the undisputed portion is paid. Do not assume that raising an objection automatically extends the payment deadline or allows you to withhold payment unilaterally.

Practical step: before buying, obtain one written formula, one complete sample invoice and one correction procedure. If all three cannot be explained consistently, hold off on agreeing until the figures and your rights are fully clear.