Buying a Franchise: Clarify How Royalties Are Calculated

A royalty that looks modest in a franchise offer can become a different financial burden once the outlet is trading. The reason is often not the percentage itself, but the definition of turnover used to calculate it. Transparency about royalty formulas helps prospective franchisees compare brands fairly. Before committing, make sure you can calculate the bill yourself using sample transactions, rather than simply accepting the franchisor’s final figure.

1. Find the royalty formula in the official documents

Indonesia regulates franchising specifically through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. Franchise operations are governed by a franchise agreement, and payment arrangements for fees are among the matters that must be covered in that agreement.

Franchisors must also provide prospective franchisees with an offering prospectus at least 14 calendar days before the agreement is signed. Use this document to check that the fees quoted match the draft contract. These rules do not mean that every brand uses the same royalty formula.

Look for provisions covering the percentage rate, fixed fees, minimum royalties, calculation period and the date on which payment obligations begin. Check whether royalties become payable from the date the contract is signed or only after the first sale.

If the offer refers to “royalties based on turnover” but the contract does not define turnover, ask for written clarification before signing. Explanations given during sales discussions should be incorporated into a binding document. Royalty levels are commercial terms that you need to understand and negotiate, not standard rates set by the government.

2. Examine which transactions count towards turnover

The terms “gross sales” and “net sales” are not clear enough without a breakdown of their components. Create a simple table listing each transaction type, whether it is included in the royalty calculation, and the supporting records. Prioritise the following items:

• Tax collected from customers: is it excluded from revenue when calculating royalties?
• Discounts: are royalties based on the price before or after the discount, and who bears the cost?
• Cancellations and refunds: when are these transactions removed from the calculation?
• Sales through delivery apps: are royalties calculated before or after the app’s commission?
• Vouchers and advance payments: are they counted when payment is received or when the product is supplied?
• Delivery and service charges: are these treated entirely as outlet sales?

Franchisors are not automatically required to accept every deduction. The aim is to obtain a clear, consistent definition that can be checked. The basis for calculating royalties does not necessarily follow the same treatment used for accounting or tax purposes.

For example, a customer pays through an app, which then transfers the money after deducting its commission. The amount reaching the outlet’s bank account may be lower than the sales value used to calculate royalties. This difference is not necessarily an error, but it should be apparent when you assess whether buying the franchise is financially viable.

3. Test the bill using a one-month example

Ask the franchisor to provide a sample calculation for one month, complete with a transaction summary and royalty invoice. The example can be anonymised to protect another outlet’s confidential information. Do not limit the example to straightforward sales: include cancellations, vouchers, discounts and transactions that span different months.

Build your calculation in the following order:

1. Record the value of customer transactions for each sales channel.
2. Separate out any components that the contract excludes from the royalty calculation.
3. Apply the agreed percentage or fixed fee.
4. Check whether a minimum royalty overrides the calculated amount.
5. Apply the appropriate tax treatment to the invoice, taking account of the applicable rules and each party’s tax status.

Repeat the exercise with lower sales and a higher proportion of sales through apps. A minimum royalty may still be payable when turnover falls, while app commissions can reduce the cash available to pay the bill.

Also distinguish between tax collected from customers and tax on royalty payments. Ask an accountant to assess whether the quoted amount includes tax, what withholding obligations apply, if any, and what supporting documents must be provided. Do not assume that the figure in the brochure represents the full final payment.

4. Agree billing and adjustment procedures before buying

Even a clear formula needs procedures for putting it into practice. Establish the cut-off date for sales reports, when invoices will be issued and how long you have to pay. If an app releases funds only after the royalty payment is due, you need to understand how much cash you will need to bridge the timing gap.

Ask for the contract to explain how invoices will be adjusted if a customer refund takes place in the following month. Choose a workable mechanism, such as a deduction from the next invoice supported by transaction records. Also clarify how to raise a dispute, the deadline for reviewing it, and how the undisputed portion of the invoice will be handled.

Make sure there is a clear approval process for changes to the percentage rate, calculation basis or minimum royalty. Do not assume that rights to adjustments or restrictions on changes apply automatically; ask for both to be expressly stated in the agreement.

Practical step: before buying, obtain a written definition of turnover, one sample invoice calculation that you can reproduce yourself, and an adjustment procedure. If these three elements remain unclear, do not judge a brand’s affordability solely by its royalty percentage.