Margins and commissions when franchising in Mexico

When turning your business into a franchise, explaining how much it costs to open an outlet is not enough. You also need to define how the franchisee’s margins or commissions will be calculated. An ambiguous formula can lead to disagreements even when sales are strong. Across the franchise sector, setting out clear financial principles helps build sustainable relationships without presenting profitability as a guarantee.

1. Identify which concept applies to your model

Margins and commissions are not the same. Before drafting clauses, establish how the person operating the outlet earns revenue and which costs they bear.

In a purchase-and-resale model, the franchisee buys products and sells them to customers. Their gross margin depends on the difference between net sales and the cost of goods sold. That margin is not yet the final profit: expenses such as rent, payroll, utilities and franchise fees still need to be deducted.

In a commission-based model, the franchisee receives remuneration calculated on specified transactions. Here, it is important to clarify which transactions give rise to an entitlement to payment, the calculation basis and when the commission is deemed to have been earned.

Hybrid models are also possible. An outlet might resell certain products and earn commissions on other services. In that case, it is best to keep the two mechanisms separate rather than present a single percentage that obscures the differences.

First deliverable: a fact sheet for each revenue stream identifying who sells, who issues invoices, who collects payment and who bears the associated costs.

2. Turn the financial principles into a clear clause

Mexico specifically regulates franchising through its Federal Law on the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI). Article 246 requires franchise agreements to be in writing and to include, among other things, the criteria and methods used to determine the franchisee’s profit margins or commissions.

This requirement does not mean that the law sets a mandatory percentage or that the franchisor must guarantee profits. It means that the agreement must explain how those figures are determined under the agreed model.

To make the clause workable, define:

• Calculation basis: invoiced sales, sales for which payment has been received, or another clearly identified measure.
• Tax treatment: whether amounts are stated before or after indirect taxes, subject to an accounting review.
• Deductions: returns, discounts, cancellations and any other expressly specified adjustments.
• Period: when the result is calculated and the cut-off date for each period.
• Supporting documents: sales records, invoices, credit notes or payment collection reports.

Avoid expressions such as “the brand’s usual margin” unless they are defined. If you use a financial schedule, identify it and incorporate it properly into the agreement. A sales spreadsheet should not replace the agreed terms.

3. Test the formula against actual transactions

Before offering the franchise, apply the method to records from your existing business. The aim is not to produce a sales forecast, but to check that two people can obtain the same result using the same data.

A standard formula for gross margin as a percentage is: net sales minus cost of sales, divided by net sales, multiplied by one hundred. You must define each component and specify what happens if there are no sales during the period.

Do not confuse this margin with the mark-up on cost: the latter divides the difference between price and cost by the cost, not by sales. Although both use the same amounts, they produce different percentages.

For commissions, test situations that commonly raise questions:

• A sale made at the end of the month for which payment is received later.
• A transaction cancelled after the commission has already been paid.
• A discount funded by the franchisor or the outlet.
• A partial payment or a partial return.

Document the intended treatment of each scenario. If the formula only works when nothing goes wrong, it is not yet ready to be incorporated into the model.

4. Align the sales explanation with the settlement process

The sales presentation, pre-contractual information and agreement must all describe the same mechanism. Do not advertise “guaranteed profit” when you have only calculated a gross margin before expenses.

Prepare a sample settlement statement that allows the reader to trace the calculation from the transactions through to the resulting amount. Establish who prepares it, how discrepancies are reported, which documents can be used to review them and how errors are corrected. Distinguish between correcting an arithmetic error and changing the financial terms: they are not the same thing.

Before using the model, arrange a joint legal and accounting review. The legal review should check that it aligns with the agreement; the accounting review should confirm that the definitions and calculations are consistent.

In practice: have a financial fact sheet, a clause and a sample settlement statement ready. If all three explain the same result without verbal clarification, you will have a stronger foundation for franchising.