Franchise royalties: checking sales and reports

When turning an existing business into a franchise network, choosing a royalty percentage is not enough. You need to be able to trace the figures used to calculate it, without leaving room for different interpretations by the franchisor and franchisees. Before recruiting franchisees, put a sales reporting process in place: which transactions count, where the data comes from, who corrects errors and how discrepancies are resolved.

1. Define what must be reported, not just the percentage

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 3 requires the agreement to be in writing, failing which it is void, and requires it to state expressly how royalties are calculated and paid, as well as any minimum sales revenue the franchisee must achieve.

If you choose turnover-based royalties, a broad phrase such as ‘a percentage of sales’ can leave important questions unanswered. Your administrative process must start with precise contractual terms, checked with your legal adviser and whoever handles your accounts.

Cover at least the following points:

• how VAT is treated in the royalty calculation base;
• how discounts, returns and cancellations are treated;
• when a sale is allocated to a reporting period;
• how deposits, gift vouchers and subscriptions are handled;
• how sales through third-party platforms are treated;
• how online orders fulfilled or delivered by the franchisee are allocated.

Receiving payment, making a sale and issuing an invoice are not always the same event. A gift voucher, for example, may be bought in one month and redeemed in the next. The rule you choose must avoid double counting and be consistent with the agreement; the accounting and tax treatment should be assessed separately with your accountant.

2. Map your data sources and exceptions

In the original business, the owner often knows the till discrepancies by heart. In a franchise network, that informal knowledge is not enough: every item must have an identifiable source.

Prepare an internal table linking each sales channel to its source system, supporting record, reporting period and person responsible for checking it. For a physical shop, the source might be the point-of-sale system; for online orders, it might be the system that records the order and its fulfilment.

Do not assume that payments credited to a bank account automatically represent the royalty calculation base. A platform may pay out an amount after deducting its commission: that net figure does not necessarily match the sales value specified in the agreement.

Keep a separate log of exceptions. Each adjustment should record:

• the original transaction it relates to;
• the reason for the change;
• the supporting document;
• the period in which the adjustment is credited or charged.

For example, if a return relates to a sale that has already been reported, the system must allow you to link the two events. A negative entry with no reference makes it difficult to distinguish a legitimate correction from an error.

3. Test a full period-end close using your existing business

Before asking franchisees to submit reports, run a trial using your own business data. This is not just about checking that the software produces a total: you need to show that someone else can reproduce it without relying on the founder.

Choose a period that includes both routine transactions and genuine exceptions. Ask the person who handles administration to prepare the statement, then have someone else check it using only the available instructions.

The statement should show the starting total, permitted exclusions, adjustments, resulting calculation base, royalty rate and calculated royalty separately. Avoid spreadsheets where the final result conceals manual steps.

Also test what happens when data arrives late, a sale is imported twice or a platform connection is unavailable. Decide who reports the problem and how the solution is documented. The test succeeds when the calculation can be reproduced and discrepancies can be explained, not when the total looks plausible.

4. Set up proportionate checks and traceable corrections

Set a clear timetable covering the period-end close, report submission, checks, any queries and payment in accordance with the agreement. Appoint a contact on each side so that every discrepancy does not turn into a commercial negotiation.

Any rights to access data and carry out checks must be set out in the agreement, with a clear scope and procedures. Do not assume that the franchisor can inspect any information held by the franchisee.

Aggregated data or transaction details without customer names are often enough to check royalties. If personal data is processed, you must comply with the General Data Protection Regulation, Regulation (EU) 2016/679, clarifying roles, purposes, access rights and retention arrangements according to the processing actually carried out.

Finally, retain a version history: a correction should not erase the previous report, but explain what has changed and why.

What to do now: prepare a sample report, include a return and a sale through a platform, then ask a colleague to reproduce the calculation. If verbal explanations are needed, the process is not yet ready for your first franchisees.