Franchise Royalties: Checking Sales Definitions and Monthly Billing Before You Sign

When comparing franchise brands, it is easy to assume that lower monthly royalties mean lower costs. Yet even at the same rate, your actual outgoings will vary depending on which sales the rate applies to, whether there is a minimum payment and when cancelled orders are deducted. A lasting franchise relationship requires an understanding of both what the franchisor is paid for and the costs the franchisee bears. Before signing, ask for more than a rate schedule: obtain calculation rules that you can test against actual order records.

1. Check the payment structure, not just the fee name

Royalties generally pay for the use of a brand and ongoing operational support. However, franchisors may use different names for their charges. Trademark licence fees, business support fees and monthly management fees should all appear in your overall cost breakdown if they are recurring payments. Equally, do not assume that charges covering different services are the same simply because their names sound similar.

South Korea’s Fair Transactions in Franchise Business Act defines a continuing trading relationship in which franchise fees are paid in return for the use of business identifiers and support, training and other assistance with management and business operations. The franchise disclosure document sets out matters including the franchisee’s financial obligations and operating conditions. Your review of royalties should therefore begin by reading the relevant sections of both the disclosure document and the franchise agreement, rather than relying on sales materials.

First, establish which of the following structures applies.

• Fixed monthly fee: A set amount is payable regardless of sales.
• Sales-based fee: An agreed percentage is applied to the sales figure defined in the contract.
• Sales-based fee with a minimum payment: A specified minimum is payable even if the percentage-based calculation produces a lower amount.
• Tiered fee: The rate or payment changes according to the sales band reached.

For a tiered fee, ask whether a higher rate applies to all sales or only to the portion above the relevant threshold. If the agreement merely says that fees are ‘charged according to sales’, it will be difficult to reproduce the monthly calculation yourself. Ask for both a written explanation and a table showing how the calculation works.

2. Break down the sales definition by order type

The most important question is: ‘What counts as sales?’ The amount paid by the customer, the amount recorded in the point-of-sale system and the amount remitted by a delivery platform may differ. In particular, your cash-flow planning could be disrupted if you assume royalties are based on the amount received after platform fees, only to discover later that the contract uses gross sales.

Start by checking whether the sales figure includes or excludes VAT. Separately, establish whether the quoted royalty charge includes any VAT payable on the royalty itself. The tax treatment of the sales base and that of the royalty invoice are two different issues. Checking how tax invoices are issued will also help you calculate your monthly outgoings more accurately.

Ask for written answers to the following questions about different order types.

• For discounts funded by the franchisee, are sales recorded before or after the discount?
• How are discounts funded by the franchisor treated: as sales or as a separate reimbursement?
• Are delivery and packaging charges included in the sales figure used to calculate royalties?
• Are gift vouchers counted when sold or when redeemed?
• What records are required to deduct partial refunds, cancelled orders and payment errors?

Not every brand needs to answer these questions in the same way. What matters is that the contractual rules are clear and match the actual billing process. For transactions such as gift vouchers, where sale and redemption occur separately, check that the same amount is not counted twice. After receiving an explanation, summarise the treatment of each order type on a separate line and ask the franchisor to confirm it. This can help prevent omissions.

3. Calculate the cost of low-sales months and temporary closures

Calculations based only on average expected sales are not enough to assess the royalty burden. You also need to establish what will be payable during the opening period, quieter seasons and closures caused by building work or illness. A fixed fee may remain unchanged when sales fall, while a minimum payment can increase the effective royalty rate in low-sales months.

Ask the franchisor for worked examples covering a normal trading month, a low-sales month, a mid-month opening and a month of closure. These examples are not guarantees of future earnings; they are a way to check how the cost formula works. Use sales assumptions that fit your own cautious operating plan, and clearly distinguish assumptions from confirmed contractual terms.

Check whether charges are calculated pro rata if you open part-way through a month, and whether fixed fees start accruing during preparations for opening. Do not assume that royalties are automatically waived during a closure approved by the franchisor. If a waiver or reduction is available, record the qualifying circumstances, application process, approving authority and applicable period in detail.

If royalties are waived for an introductory period, calculate the costs that will apply once that support ends. Check whether the waiver depends on a particular opening date or sales conditions, and whether other charges remain payable. In your brand comparison table, show monthly payments during the support period alongside those due once normal charges begin.

4. Make billing statements and error correction part of the contractual checks

Even clear calculation rules will not help you identify errors if you cannot inspect the billing breakdown. Before signing, request a sample royalty statement with personal information and details identifying individual outlets removed. Check whether it separately shows the sales base, excluded amounts, applicable rate, any minimum payment applied, tax and the final amount billed. This will help you judge whether you can verify the charges in practice.

The billing timetable matters too. Check the sequence of the sales cut-off date, statement issue date and payment due date. If royalties fall due before the delivery platform transfers your takings, you will need working capital to cover the gap. Even where payment is collected automatically, it is sensible to ensure you have time to review the calculation before funds leave your account, as well as a named contact or team for reporting errors.

Consider what happens when an order from last month is refunded this month. Check which month’s statement will show the deduction, and whether an overpayment will be offset against the following month’s bill or refunded. Agreeing which records should be checked first when sales figures differ, and how supporting evidence should be submitted, can also reduce billing disputes.

Standard terms prepared by the franchisor may fall within the scope of South Korea’s Act on the Regulation of Terms and Conditions. Terms that are unreasonably disadvantageous to the customer, among others, are presumed unfair, and unfair terms that breach the principle of good faith are void. However, the validity of a deadline for raising objections or a billing clause depends on its specific wording and circumstances. If you have concerns, ask a Korean franchise transaction specialist or lawyer to review it.

As a final check, summarise fee names, calculation formulas, sales inclusions and exclusions, billing dates and error-correction procedures on one page, then compare that summary with the contract wording. A useful final test is to check whether you and the franchisor arrive at the same amount using the same order records. Assess royalties primarily by whether their calculation is clear and verifiable, rather than by the headline rate alone.