Buying a Franchise in Lebanon: Defining the Royalty Calculation Basis

One brand’s royalty rate may look lower than another’s, but the comparison can change once you read the definition of ‘sales’ in the agreement. Before entering Lebanon’s franchise market, ask what the rate applies to, not just what the rate is. This guide focuses on the royalty calculation basis: which amounts are included, what is excluded, when royalties become payable and how to check a royalty demand before paying it.

1. Turn the sales definition into a checklist you can test

Start by requesting the full royalty clause, together with any definitions and schedules it refers to. Do not settle for ‘a percentage of net sales’: ‘net’ may mean sales after returns only, rather than after delivery commissions, discounts or taxes. You need a contractual definition that an accountant can apply to the outlet’s data without guesswork.

Draw up a table of every expected revenue stream and other receipt, and ask for written confirmation of whether each is included or excluded:

• In-store sales and orders placed through websites and apps.
• Orders handled by delivery platforms that deduct commission.
• Taxes collected from customers, and delivery and service charges.
• Tips collected on behalf of staff.
• Voucher and gift card sales, and their subsequent redemption.
• Deposits, advance payments and cancelled orders.

Do not assume that the amount reaching your bank account is the royalty calculation basis. The agreement may calculate royalties on the value of a delivery order before the platform deducts its commission, even though you receive only the balance. This is not necessarily a calculation error, but it is a commitment you must factor into your costs before buying the franchise.

Also ask how sales are allocated to your outlet when the franchisor collects payment for an online order and then passes it to you to fulfil. The same transaction should not be counted twice: once when recorded centrally and again when settled with the outlet.

2. Set out exclusions and timing in your Lebanese agreement

Lebanon has no comprehensive franchise-specific law, nor a general statutory regime requiring a franchise disclosure document before a sale. The relationship is governed primarily by the Code of Obligations and Contracts, with the Commercial Code, tax rules and other provisions applying according to the issue concerned. Do not therefore assume that there is a standard legal definition of sales that automatically applies to your royalty calculation.

A separate legal question is whether Legislative Decree No. 34 of 1967 on commercial representation may apply to some relationships; their legal classification is disputed. Ask a Lebanese lawyer to assess your agreement, and do not base your calculations on the assumption that every franchisee enjoys the protections available to a commercial representative.

Discuss with your lawyer and accountant the exclusion of taxes collected on behalf of the Treasury, cancelled sales and amounts actually refunded to customers, supported by clear documentation. These are points to negotiate and record in the agreement, not a list of special rights guaranteed by franchise legislation. Excluding an amount from the royalty calculation basis does not, in itself, determine its tax treatment.

Specify when a transaction counts: when the invoice is issued, the order is delivered or payment is received? If a transaction is refunded in a later month, is the following month’s calculation basis reduced, or is a credit note issued? For gift cards, agree how sales, redemptions and expiry will be treated, avoiding double counting and clarifying each outlet’s responsibilities.

3. Test discounts and minimum royalties before comparing brands

Once the definition is settled, request a written sample calculation using clearly defined hypothetical transactions. You do not need a full profit forecast; you need to check that both parties arrive at the same result from the same data.

Test at least a standard sale, a delivery order subject to commission, a discounted sale and an order refunded after the month-end close. For joint promotions, ask who funds the discount: the outlet, the franchisor or the platform? Is any reimbursement you receive for the discount included in the royalty calculation basis? The issue here is not who has the authority to impose the promotion, but how it affects the calculation once it has run.

Also check for a recurring minimum royalty or an additional fixed charge. A low percentage may matter little if the minimum exceeds the calculated royalty during the outlet’s start-up period. Ask whether the minimum is reconciled monthly or annually, whether any difference can be carried forward and when it first becomes payable.

If sales are recorded in one currency and royalties billed in another, specify the exchange-rate source, the date used and how refunds are handled. Do not leave conversion subject to an undefined phrase such as ‘the applicable rate’. Compare brands’ offers using the same set of transactions, rather than the advertised percentages alone.

4. Require a statement you can check with every royalty demand

Ask for every royalty demand to be accompanied by a statement showing total sales, exclusions, prior-period adjustments, the final calculation basis and the percentage or minimum applied. Ideally, agree a statement template in a schedule to the agreement, rather than discovering the calculation method after you start trading.

Set a reasonable deadline for raising disputes, specify the supporting documents required, identify who will review discrepancies and agree how overcharges or undercharges will be corrected. Discuss a procedure for paying the undisputed portion while resolving the balance. Do not assume that raising a dispute automatically suspends payment obligations or allows you to deduct amounts unilaterally.

Before signing, ask your accountant to reconcile the sample royalty demand with point-of-sale and platform reports. If the system cannot separately identify an agreed exclusion, request a technical solution or a supporting documentation procedure before adopting it. Keep a copy of the agreed definition, worked examples and related approvals.

Practical takeaway: Do not agree to a royalty rate until you can reproduce the calculation yourself. Set out the calculation basis, exclusions, timing and correction procedure, then compare the actual cost across brands.