Sales Proceeds and Settlement Terms to Check Before Joining a Franchise in Japan

When considering a franchise, do you check not only the likely profit but also when sales proceeds will reach your bank account? Under an agreement where the franchisor collects sales proceeds and deducts expenses, accounting profit may not match the cash you have available. To start your franchise business with confidence, confirm the transfer and settlement terms in writing, with specific dates, before you commit.

1. Trace the money from the customer’s payment to your account

First, ask the franchisor to explain the process from the moment a customer pays until the funds become available for you to use freely. Your working capital needs will differ depending on whether you receive the sales proceeds directly or whether the franchisor or a payment provider receives them first. When comparing brands, assess this separately from profitability.

For each payment channel you expect to use — cash, cards, electronic payments, booking sites, delivery services and so on — list the following:

• The business receiving the customer’s payment and the name of the account holder
• Whether you must transfer sales proceeds to the franchisor, and how often and by what deadline
• The sales cut-off date and the date funds are paid into your account
• Who bears bank transfer and payment processing fees
• What happens on non-business days, during payment system failures or when sales data does not match

For example, if you must transfer all cash received in the shop every day, you may not be able to use that cash for the next day’s purchases or till float. Rather than assuming that cash sales will cover your immediate needs, establish how much you can retain on site and how much funding you must arrange separately.

Alongside the agreement, request the transfer rules, settlement timetable and operating instructions for franchisees. Drawing a diagram of the cash flow and asking the franchisor to check it can help reveal misunderstandings.

2. Check deductions and settlement statements

If the franchisor transfers the balance remaining after various costs have been deducted, rather than the gross sales proceeds, you need to know what is deducted, on what basis and when. This needs checking separately from whether the charges themselves are high or low.

For royalties, stock purchases, system fees, payment processing fees and amounts paid on your behalf, identify which charges are deducted and the calculation period for each. Distinguish these from costs paid separately against invoices so that you do not count the same expense twice in your cash flow plan.

Ask the franchisor for an anonymised sample settlement statement or a worked example to understand how the process operates. Check whether you can trace gross sales, returns, discounts, fees, other deductions, balances carried forward from the previous month and the final payment. If you are told only the amount being paid, it will be harder to spot errors or reconcile payments with your accounts.

Pay particular attention to clauses allowing the franchisor to deduct disputed charges from sales proceeds at its discretion. Ask which amounts can be set off or deducted, whether advance notice and an itemised statement are provided, and how to raise an objection. A deduction is not necessarily lawful simply because the agreement permits it, but objecting will not necessarily stop it automatically either.

Also check the deadline for correcting errors and when any money owed will be returned. If the practice is to make an adjustment the following month, consider who will fund the shortfall in the meantime.

3. Test cash flow using dated entries, not just monthly profit figures

When testing cash flow, record the date on which you can actually use the funds, not the date of the sale. Even if your month-end balance is positive, you could still face a shortfall when wages or rent fall due earlier in the month.

Focus particularly on the period between opening and the point when the regular settlement cycle is established. Build a dated cash flow forecast in this order:

1. Enter the bank balance available for use after opening.
2. Record transfers to the franchisor and receipts from the franchisor separately.
3. Add payment dates for rent, wages, stock purchases, taxes, loan repayments and other expenses.
4. Calculate daily balances and identify the lowest point.
5. Reassess the cash buffer needed if payments arrive late or sales fall.

Take care not to record costs already deducted by the franchisor as outgoing payments again. Equally, do not overlook expenses paid outside the franchisor’s settlement process. Having a tax adviser or another suitable professional review the settlement statement alongside your cash flow forecast can help clarify the figures.

If you are seeking finance, include not only the initial franchise fee and equipment costs but also the working capital needed before sales proceeds become available. Take documents showing payment dates and deduction terms to the lender, and discuss when funding will be needed as well as how much. Do not leave a cash shortfall unresolved on the assumption that a loan will come through.

4. Plan for refunds, withheld payments and the franchisor stopping payments

Understanding settlement in a normal month is not enough if the rules for exceptional situations remain unclear. Check which month’s settlement will reflect customer refunds, cancelled card transactions and chargebacks arising from fraudulent use.

If the franchisor can withhold payments, ask for specific details of the grounds, the amount that may be withheld, the conditions for release and how you will be notified. Also establish whether a query over part of the sales data could lead to unrelated sales proceeds being withheld.

Ask how sales proceeds received by the franchisor but not yet settled are held, and how they are treated under the agreement. Do not assume that you would recover all your money if the franchisor became insolvent merely because it says the funds are held in a separate account. If safeguards exist, request documents setting out their scope, conditions and exceptions. The prospects of recovery depend on the agreement and how the funds are actually managed, so consult a lawyer if you have concerns.

Include the final settlement at the end of the agreement in your checks. Clarify the deadline for the final payment, any amount retained to cover refunds and when the remaining balance will be returned. Wages, taxes and other payments may still fall due after trading has ended.

5. Assess the terms against Japan’s disclosure rules

In Japan, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to provide prospective franchisees with prescribed information in writing and explain it before an agreement is signed. Coverage depends on the statutory criteria; the requirement does not apply uniformly to every franchise agreement.

When reviewing transfers and settlement of sales proceeds, check that the explanations of financial and trading terms in the disclosure document are consistent with the agreement, settlement rules and sample statements. However, not every practical check listed here is necessarily a statutory disclosure item. Ask for any additional information you need.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act are also relevant to a wide range of franchises, not just retail and food service businesses. Franchisors and franchisees are independent businesses, and their dealings are subject to the Antimonopoly Act. If a franchisor uses a superior bargaining position to impose an unjust disadvantage on a franchisee, this may raise concerns about abuse of a superior bargaining position.

However, a transfer obligation or deduction is not automatically unlawful: an assessment must take account of the specific terms and how they are applied. The Civil Code and other laws may also be relevant to contractual payment obligations and failures to fulfil them. Avoid signing while terms remain unclear in the hope that you can change them after joining.

Key practical steps: Ask the franchisor for details of the flow of funds, a sample settlement statement and the rules for exceptional situations. Then build a cash flow forecast that includes your own payment dates. Before deciding to join, check not only whether the business can make a profit, but also whether you can access the money on the days you need it.