How to Calculate Franchise Royalties: Check the Sales Basis and Payment Terms Before Signing

When considering a franchise in South Korea, a low royalty rate alone is not enough reason to choose a brand. Even at the same rate, the actual cost can vary depending on which sales are included and which deductions are allowed. For a lasting relationship between franchisor and franchisee, both sides need clarity not only on how much is payable, but also on how it is calculated and checked. Before signing, look beyond the figures in promotional materials and review the contract terms alongside worked examples.

1. Check the payment obligations and formula, not just the name of the fee

A royalty usually means a payment for the right to use a brand or receive ongoing operational support. Contracts may, however, use other names, such as trademark licence fees, management support fees or recurring franchise fees. A different label does not mean that a charge is optional or falls outside your financial obligations. Start by listing every payment you must make to the franchisor monthly or at other regular intervals.

First, establish whether the charge is a fixed fee, a percentage of sales or a combination of the two. Even a sales-based royalty can effectively become a fixed cost in a quiet month if there is a minimum payment. Conversely, if there are tiered rates or a cap, check exactly when they apply. If royalties are waived during the initial opening period, note both the end date of the waiver and the billing month in which normal charges begin.

Ask the franchisor to confirm the following in writing to reduce gaps in the explanation:

• The rights or services provided in return for the royalty
• The monthly calculation formula, sales bands, and any minimum payment or cap
• Whether the royalty itself includes VAT and how tax invoices are issued
• Whether charges are calculated pro rata for partial trading months, such as the first and last months
• How charges apply during temporary closures or failures of the franchisor’s systems

Do not assume that no sales means no royalty before reading the contract. Check first for fixed fees or minimum payments, and ensure that any verbally promised waiver and its conditions are recorded in the contract documents.

2. Break down what counts as ‘sales’ by transaction type

The most important terms are those defining the calculation basis, such as ‘gross sales’, ‘net sales’ or ‘sales revenue’. Without contractual definitions, these terms can be interpreted differently. In particular, the amount paid by the customer, the amount recorded in the point-of-sale (POS) system and the amount credited to the franchisee’s bank account may not be the same. The contract should identify the data source and the specific figures used.

Check VAT treatment in two separate places. First, does the sales figure used to calculate the royalty include VAT? Second, is VAT added to the royalty once it has been calculated? These are different questions. If a quotation says ‘excluding VAT’ without making clear which amount this refers to, ask the franchisor to set out the calculation again.

The following questions are useful for each transaction type:

• Discounted orders: Is the royalty based on the listed price before discount or the actual selling price?
• Coupons: Does the treatment vary depending on whether the franchisor, franchisee or an external platform funds the discount?
• Delivery orders: Is the royalty based on sales before platform commission and payment processing fees are deducted?
• Delivery charges: How are amounts retained by the franchisee distinguished from those passed on to the delivery service?
• Gift vouchers: Are they counted when sold or when redeemed, and how is double counting prevented?
• Cancellations and refunds: If an order is refunded after the royalty has already been calculated and paid, which month’s royalty is adjusted?

Do not assume that the law automatically allows all these items to be deducted. Check the contract to establish which deductions are permitted and to what extent. In particular, even if a delivery platform transfers funds after deducting its fees, the contractual royalty basis may still be the sales amount before those deductions. Do not estimate your royalty costs from bank receipts alone.

It is also worth checking staff discounts, complimentary items, loyalty point redemptions and sales on credit in the same way. Not every item will be relevant to every brand. Start by listing the ordering channels and payment methods you will actually use, then ask how each transaction appears on the royalty statement.

3. Cross-check the disclosure document, contract and worked examples

Franchise transactions in South Korea are governed by the Fair Transactions in Franchise Business Act. This legislation sets out requirements for registering and providing franchise disclosure documents, as well as matters that must be included in franchise agreements. The disclosure document covers matters such as the franchisee’s financial obligations and operating conditions, while the franchise agreement must include provisions on the payment of franchise fees and other charges. When reviewing royalties, the key is to check that these documents describe the same obligations.

The existence of a registered disclosure document does not guarantee that the royalty is commercially reasonable or that the business will be profitable. If the disclosure document lists only a sales-based rate but the contract also includes a minimum payment, ask for an explanation and have the inconsistency resolved. If either document refers to separate operating rules or supplementary agreements, obtain those documents before signing too.

You can ask the franchisor for a sample royalty statement with personal and outlet-identifying information removed, or for a hypothetical worked example. This is a practical due diligence request, not a suggestion that you always have a legal right to receive information in your preferred format. If obtaining a sample proves difficult, try preparing your own example transactions and asking the franchisor to fill in the calculations.

Include full-price sales, franchisee-funded discounts, franchisor-funded coupons, delivery orders and refunds for orders from the previous month. Calculating the sales amount recognised, deductions and final royalty for each makes discrepancies easier to spot than abstract explanations do. Rather than relying solely on a representative’s explanation, have the agreed calculation principles incorporated into the contract or a signed supplementary agreement.

4. Agree procedures for errors and changes to the terms

Even an accurate formula is difficult to verify if you cannot inspect the underlying records. Check which sales data you can view or download, what the franchisor’s royalty statements show, and how records are retained. In particular, it helps to agree which source takes precedence if the franchisor’s system and a delivery platform show different figures, and who is responsible for investigating the discrepancy.

The contract should ideally specify when statements are issued, when payment is due, how to raise a query or dispute, and how confirmed errors will be refunded or deducted from the following month’s payment. Check whether you must pay the full amount while a dispute is being considered, or whether you may initially pay only the undisputed amount. Withholding payment without a separate agreement could lead to arrears or a breach of contract.

Read carefully any clause allowing the franchisor to change the rate or the definition of sales. Check the grounds for a change, the notice period, which franchisees it applies to and whether franchisee consent is required. Consider whether the arrangement allows your costs to increase through a simple operational notice. Standard terms that are unfairly disadvantageous to franchisees may warrant review under South Korea’s Act on the Regulation of Terms and Conditions. However, not every unfavourable clause is automatically invalid.

In case of a dispute, keep the applicable version of the contract, royalty statements, underlying transaction records, correction requests and replies together. If the issue remains unresolved, seek advice from a qualified Korean franchise transaction specialist or a lawyer, and consider the franchise dispute mediation procedure offered by the Korea Fair Trade Mediation Agency.

Action summary: Before signing, prepare a mock monthly royalty statement using the types of orders you expect to handle and compare it with the franchisor’s calculations. You can only make a meaningful comparison of royalty costs when the calculation basis, supporting records and error-correction procedure are all clear.