Franchise royalties in Mexico: how to agree the calculation

When franchising a business in Mexico, setting a royalty percentage is not enough. You also need to define which transactions it applies to, when the payment obligation arises and how discrepancies are corrected. A clear formula protects the financial relationship and helps build a franchise network based on verifiable rules, rather than differing interpretations at each month-end.

1. Separate royalties from other payments

The ongoing royalty is the agreed payment for the rights and benefits specified in the contract. It should not be confused with the initial franchise fee, advertising contributions, purchases of goods or additional services. Although all these payments go to the franchisor, their purpose, due dates and terms may differ.

Before choosing a formula, prepare a summary covering four points: the purpose of each payment, what it includes, how it is calculated and when it falls due. This helps identify duplicate charges or benefits that the prospective franchisee believes are included but that head office intends to charge for separately.

Options you can consider include:

• Percentage of sales: requires a precise definition of the calculation base and consistent records.
• Fixed recurring amount: makes the amount payable predictable, but creates a greater relative burden when sales fall.
• Hybrid model or guaranteed minimum: requires an explanation of when each component applies and whether the components are added together or one replaces another.

There is no legally prescribed royalty percentage that applies to all Mexican franchises. Your choice should be tested against the business’s actual performance and each unit’s ability to meet its obligations. Avoid copying another brand’s rate without knowing what it includes.

2. Define the calculation base before setting the percentage

Terms such as “total sales” or “net revenue” can lead to disagreements unless they are defined in the contract. The formula should be accompanied by a list of included transactions, exclusions and permitted adjustments.

At a minimum, answer these questions in writing:

• Does the calculation base exclude VAT (known as IVA in Mexico) charged to the customer?
• Do authorised discounts reduce the amount on which royalties are payable?
• How are returns and cancellations documented and credited?
• Are sales through platforms counted before or after platform commissions?
• How are advance payments, gift cards and credit sales treated?
• Are tips and other sums collected on behalf of third parties excluded?

These answers reflect choices about how to structure the contract; they should not be presented as universal rules imposed by franchise legislation.

For example, if you choose to calculate royalties on sales excluding VAT and after authorised discounts, but before platform commissions, a platform’s bank transfer will not necessarily represent the correct calculation base. You will need to reconstruct the transaction amounts in line with that definition.

Similarly, set out how to avoid counting a gift card twice: its purchase and subsequent redemption should not create two entries subject to royalties if the formula recognises a single sale. Have an accountant review the tax treatment of these transactions separately from the contractual calculation.

3. Make the calculation reproducible at each period-end

Two people consulting the same records should arrive at the same result. To achieve this, specify the primary sources of information: the point-of-sale system, invoicing records, platform reports and returns documentation, as appropriate.

Prepare a royalty statement template showing sales for the period, exclusions, adjustments, the resulting calculation base, the applicable rate and the royalty amount. Show any taxes applicable to the royalty charge separately; do not confuse them with taxes included in the unit’s sales.

The timetable should distinguish between the cut-off date, submission of the report, issue of the tax invoice and the payment due date. Also set a deadline for raising discrepancies and a procedure for correcting them, rather than leaving the outcome to an undocumented unilateral decision.

Test the template using historical trading periods from your business. Include a month with returns, another with promotions and another with sales across different channels. If you need to explain exceptions verbally for the calculation to work, more written rules are still needed.

4. Align pre-contract information, the contract and billing

In Mexico, franchises are regulated by the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial). Article 245 provides for information about the state of the business to be supplied before the contract is signed. Article 246 requires a written contract and includes, among its minimum contents, policies, procedures and deadlines relating to the agreed payments.

The types and amounts of payments communicated to a prospective franchisee must therefore be consistent with the contract and its schedules. Advertising an attractive royalty rate is not enough if minimum payments, surcharges or additional fees later emerge that change the financial obligation.

Arrange a legal review of the formula, the consequences of late payment and any mechanism for adjusting charges. A billing instruction or software change should not replace the contractual procedure required to amend the financial terms.

Practical takeaway: before offering your franchise, document the formula, a sample royalty statement and a timetable. If a prospective franchisee can reproduce the calculation without improvised explanations, you will have a clearer basis for the relationship.