Franchising an Existing Business: Designing Sales Proceeds Remittance and Settlement Rules

For company-owned outlets, pooling sales proceeds in the company’s bank account is generally an internal transaction. In a franchise network made up of independent businesses, however, remitting money to the franchisor is a transaction between separate businesses. When franchising an existing business, decide whose sales are involved, who receives the proceeds and when settlement takes place before recruiting franchisees. This article focuses on arrangements in which the franchisor collects and settles franchisees’ sales proceeds.

1. Map sales and payment flows separately

Start by identifying the business that sells to the customer. The accounting treatment and responsibility for refunds will differ depending on whether the franchisor receives payment on behalf of a franchisee selling goods or services, or makes the sale itself. A shared brand is no reason to leave the identity of the seller unclear.

For each payment channel, including cash, card payments, booking websites and delivery services, identify:

• The business selling the goods or services to the customer
• The business that initially receives the customer’s payment
• The contracting party named in the payment service agreement and the account into which funds are paid
• The date on which the sale is recorded and the date on which payment is actually received
• Who handles cancellations and refunds

For example, if the franchisee keeps cash received in-store while the franchisor receives only online payments, the settlement calculation cannot simply require the franchisor to pay the franchisee the full value of all sales. The system must track sales records and actual receipts separately.

Be clear, too, about why the franchisor is collecting the money. Is the aim to provide a single payment channel for customers, or to reduce franchisees’ administrative workload? If you cannot explain the purpose, compare this arrangement with letting franchisees receive payments directly. Central collection need not be a prerequisite for standardisation.

2. Define permitted deductions and settlement dates

If the franchisor deducts amounts such as the cost of goods supplied and royalties from the proceeds received, then transfers the balance, a clause simply allowing the deduction of ‘various expenses’ is not enough. Separately from setting the charges themselves, decide which amounts owed will be settled, when and on the basis of which supporting records.

The settlement statement should show, at a minimum, the period covered, the amount received by the franchisor, each deduction, adjustments relating to previous periods and the amount to be transferred to the franchisee. Amounts recorded as sales but not yet received from the payment provider should be distinguished from funds already received.

A practical settlement timetable should specify, in order:

1. The cut-off date for sales data
2. The date the settlement statement is provided to the franchisee
3. The period allowed for the franchisee to check the statement
4. The date the franchisor transfers the funds
5. The date for correcting any discrepancies identified

Also establish how non-working days are handled, who pays bank transfer charges and the deadline for notifying changes to bank details. Rather than relying on broad discretion to change payment dates ‘at the franchisor’s convenience’, provide a normal schedule that franchisees can use for cash-flow planning.

Consider whether a dispute should suspend the entire settlement payment or whether undisputed amounts should be paid on schedule. Keeping contractually authorised deductions separate from claims still being checked helps prevent unnecessary conflict.

3. Test refunds, payment reversals and shortfalls

Testing the settlement process only against ordinary sales can leave you struggling with exceptions after launch. Before recruiting franchisees, use transaction records from company-owned outlets to run mock franchisee settlements. This is an administrative test of whether money movements can be reproduced correctly, rather than a trial of a new operating outlet.

Scenarios should include returns in the following month, cancelled bookings, partial refunds, duplicate payments and delayed receipts from payment providers. For card payment reversals or chargebacks arising from payment disputes, establish who submits supporting documents and who monitors progress.

For example, if a sale is reversed after it has already been settled, merely stating that it will be ‘adjusted in the next settlement’ does not address what happens if the next payment is too small to cover it. Design the full process, including how the shortfall is notified, the supporting evidence, the payment deadline and the contact point for queries. Identify separately who deals with the customer and who ultimately bears the cost.

You also need to assess franchisees’ cash flow. If funds from the franchisor arrive after wages or rent fall due, a franchisee may run short of cash despite making sales. Test a scenario in which one scheduled transfer to a franchisee is delayed, and review the working capital needed and the franchisor’s communication procedures. If the franchisor will retain a reserve, clearly define its purpose, how the amount is calculated and the conditions for release, rather than allowing funds to be held indefinitely.

4. Align Japanese disclosure obligations with the contract

Japan has no single comprehensive statute governing all franchise agreements uniformly. However, a franchisor whose operation qualifies as a ‘specified chain business’ under the Act on the Promotion of Small and Medium-sized Retail Business must, under Article 11, provide prospective franchisees with a document containing prescribed information and explain it before the agreement is signed.

Whether an operation qualifies depends on its substance, not its name. Relevant criteria include primarily serving small and medium-sized retailers; continuously supplying goods, or arranging their supply, and providing management guidance under standardised agreements; permitting the use of trade marks or similar identifiers; and collecting money when a business joins the network. Simply describing an operation as retail or food service does not automatically determine its status.

Required disclosures include the timing and method of remittance where franchisees must regularly remit all or part of their sales proceeds. Where interest is applied to the balance remaining after offsetting receivables and payables arising from transactions over a specified period, the interest rate or calculation method must also be disclosed. Avoid a situation in which only operational staff understand remittance obligations and settlement terms, while prospective franchisees receive no explanation.

Even for businesses outside this statutory scope, general laws such as the Civil Code apply to contracts, and the Antimonopoly Act applies to transactions between franchisors and franchisees. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act explain its approach to applying that legislation. Problems may arise, for example, where a franchisor uses a superior bargaining position to impose settlement terms that unfairly disadvantage franchisees.

Compare the franchise agreement, disclosure document and sample settlement statement side by side, checking that remittance dates, deductions and correction procedures match. Depending on the collection method, you may also need to review payment providers’ merchant terms and legislation such as the Payment Services Act. A prudent approach is to seek professional advice, showing both the named contracting parties and the actual flow of funds.

5. Build controls that allow franchisees to reconcile their payments

Use the franchisee’s ability to trace its own sales records through to the amount transferred as the benchmark for your controls. Link transaction numbers, cancellation records and the invoice details supporting deductions. When records are amended, retain the original and revised entries and record who approved the change.

Within the franchisor’s organisation, separate responsibility for preparing statements, approving transfers and reconciling receipts as far as practicable. Establish a contact point for franchisee queries and a target response time. Do not simply carry unexplained discrepancies forward from month to month. Funds managed on behalf of franchisees should also be distinguished in the accounts from the franchisor’s own revenue and expenses. However, separate bank accounts or accounting records alone do not provide legal protection in the event of insolvency.

Practical takeaway: Before recruiting franchisees, use a single settlement statement to model three scenarios: an ordinary sale, a refund in the following month and a delayed payment receipt. A system that enables franchisees to explain why a particular amount will reach their account on a particular date provides a foundation for a trusted franchise network.