Defining Sales in a Lebanese Franchise Agreement: The Basis for Royalties

You may agree a royalty rate with a franchisee, only to discover that you each understand ‘sales’ differently. Does it include tax? Is the delivery platform’s commission deducted? And when does a prepaid voucher enter the calculation? When turning an existing business in Lebanon into a franchise, everyone in the franchise network needs a shared, verifiable definition, not just a clear percentage. This guide will help you establish a written basis for calculating royalties before granting your first franchise.

Why is ‘a percentage of turnover’ not enough?

Ongoing royalties may be linked to an outlet’s sales, but the sales figure is not always the amount that reaches its bank account. A platform may transfer order proceeds after deducting its commission, while the point-of-sale system records the amount paid by the customer. If bank transfers alone are used, the calculation basis may vary by sales channel, even when order values are identical.

Start with actual transactions from your business. Gather examples of a direct sales invoice, a delivery order, a return, a promotional discount and a gift voucher. Then ask your accountant to calculate the royalty basis for each case using the proposed definition. If they need to consult the founder every time, the definition is not ready for use by an independent franchisee.

Lebanon has no comprehensive franchise-specific law, nor a franchise-specific pre-contractual disclosure regime prescribing a standard model for this calculation. The agreement is governed primarily by the Code of Obligations and Contracts, alongside relevant commercial, accounting and tax rules. Do not therefore assume that the law automatically provides a detailed definition of ‘sales subject to royalties’. This must be set out in the contract and reviewed by legal and accounting professionals.

Write a definition that addresses the transaction, not the channel name

Use a precise term such as ‘sales used to calculate royalties’, rather than leaving ‘net sales’ unexplained. Define the starting figure, then list the permitted exclusions and the documentation required for each. In particular, address the following:

• Taxes: State whether VAT collected, where applicable, is excluded and how it should be shown separately in the report. This is a contractual definition of the calculation basis, not a change to tax obligations.
• Discounts: Specify whether the sales value is taken before or after the discount, and distinguish between discounts funded by the outlet and those funded by the franchisor or platform.
• Returns and cancellations: Require documentation linking the adjustment to the original transaction, and specify the period in which the deduction is recorded, particularly if the royalty has already been paid.
• Delivery commissions and payment processing fees: State explicitly whether these may be deducted from the calculation basis. Their deduction from a transfer should not automatically mean they are excluded.
• Vouchers and advance payments: Choose when to include these amounts so that the value is not counted once at sale and again on redemption. Keep this separate from the required accounting and tax treatment.

Also distinguish between delivery charges due to the outlet and amounts it collects on behalf of another party. If complimentary products or replacements are provided to resolve a complaint, specify how they should be documented rather than recording notional sales or deleting transactions without an audit trail.

Link every order to an outlet, a reporting period and supporting documentation

An additional difficulty arises when the franchisor receives orders through a central channel and the franchisee fulfils them. The parties must agree which outlet the transaction is attributed to, when it is recorded, and how cancellations or changes to the fulfilling outlet are handled. The brand name appearing on an order is not enough to establish whose royalty calculation should include the sale.

Create a simple table covering each channel: in-store sales, telephone orders, platforms and centrally received orders. For each channel, record the data source, transaction reference number, date on which the sale is recognised, and supporting documentation for any adjustment. When an order moves between two parties, retain a reference that prevents it from being counted twice.

In Lebanon, records may contain transactions in different currencies. Without reopening negotiations here over the payment currency, ensure the report shows the original currency, the agreed conversion basis and the conversion date. The aim is for both parties to be able to repeat the calculation and reach the same result, rather than having the outcome depend on how the report is generated.

Test the calculation schedule before signing the agreement

Turn the definition into a financial schedule for joint review by your lawyer and accountant. Ensure the agreement refers to it clearly and specifies which document takes precedence if it conflicts with the operations manual or software settings. Do not allow an undocumented technical update to change the royalty basis.

The schedule should specify the reporting deadline, required data, procedures for raising queries and making corrections, and rights of access to relevant records. Requests for documentation should be proportionate to the financial checks required, without collecting customers’ personal data that is unnecessary for the calculation. Explain how verified discrepancies will be addressed in the next reconciliation.

Before adopting the schedule, run a trial period-end close using actual transactions from your business, with unnecessary personal data removed or masked. Compare the point-of-sale report with platform statements and receipts, and ask for an explanation of every discrepancy. Then give the definition and reports to someone who was not involved in preparing them and ask them to repeat the calculation. A different result reveals a provision that needs clarification.

Practical takeaway: Do not grant a franchise until both parties can calculate the royalty from the same documents without relying on verbal interpretation. A sales definition, clear exclusion rules and a fully worked example are simple tools that prevent recurring disputes and preserve trust across the franchise network.