Buying a NZ Franchise: Check How Royalties Are Calculated

A franchise royalty can look straightforward: pay an agreed percentage of sales for the right to operate under the brand. But the definition of sales, payment timetable and additional charges can change what you actually pay. Before joining New Zealand’s franchising community, work through the royalty clauses with your accountant and lawyer, using realistic trading scenarios rather than relying on the headline rate.

1. Find out exactly what counts as sales

Start with the agreement’s definition of the amount on which royalties are calculated. It may be called ‘gross sales’, ‘gross revenue’ or ‘turnover’. These terms are not interchangeable, and the contract’s wording matters more than an informal explanation.

Ask whether the calculation includes or excludes:

• GST collected from customers;
• refunds, cancellations and customer chargebacks;
• discounts, vouchers and promotional offers;
• delivery charges and sales through third-party platforms;
• gift cards when sold, when redeemed, or at another point;
• invoiced sales that customers have not yet paid.

For delivery-platform orders, establish whether royalties apply to the full customer price or the amount left after the platform deducts its commission. A fee based on the full price can remain payable even though a sizeable portion of that sale never reaches your bank account.

Request a worked example covering a normal sale, a discounted sale and a refunded transaction. Then have your adviser reconcile those examples with the contract. If the explanation depends on a concession or exception, get it recorded in a legally effective written form before signing.

2. Build a complete recurring-fee schedule

Royalties may be only one recurring payment. Ask for a schedule covering every compulsory charge payable to the franchisor or associated providers, including advertising contributions, technology subscriptions, administration fees and transaction charges.

For each payment, record the calculation basis, whether GST is additional, the due date and any right to increase it. Note which charges are fixed and which rise with sales.

Pay particular attention to minimum royalties. An agreement might require a fixed minimum payment even when percentage-based royalties would be lower. That can place additional pressure on a new outlet, a seasonal business or a location experiencing a temporary closure.

Also check for stepped rates, introductory discounts and thresholds. Ask what happens when a discount expires and whether crossing a threshold changes the rate for all sales or only those above it. Do not assume fees stop during refurbishment, illness or an interruption to trading.

An advertising contribution deserves a separate line in your budget. Establish whether it replaces local advertising expenditure or sits alongside another obligation to spend locally. This is about understanding your total commitment, not treating every payment as part of the royalty.

3. Test the effect on cash flow

Ask your accountant to model the fees against a monthly cash-flow forecast. Include a slower start, lower sales and reduced gross margins. A percentage-of-sales royalty can still be payable when the outlet makes a loss because it is not calculated on profit.

Payment timing matters too. Weekly deductions may fall due before customers settle invoices or before a payment platform releases funds. Ask how the franchisor collects fees, what authority you must give for direct debits and how disputed calculations are handled.

Check the reporting and audit clauses alongside the payment provisions:

• Which sales records must you submit, and how often?
• Can the franchisor estimate fees when reports are late?
• How are errors corrected and overpayments credited?
• When can audit costs, interest or late-payment charges be imposed?

Speak to existing franchisees about the administration involved, without asking them to disclose confidential information. Their experience can help identify practical questions, but their arrangements may differ from the agreement offered to you.

4. Know which protections actually apply

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or franchise registration requirement. General laws apply, including the Fair Trading Act 1986, which prohibits misleading or deceptive conduct and unsubstantiated representations in trade, and the Commerce Act 1986, which addresses competition matters. Contract law also governs the parties’ obligations.

The Franchise Association of New Zealand (FANZ) Code of Practice and Ethics applies to its members; membership is voluntary. It requires disclosure documents to be updated at least annually and supplied at least 14 days before signing a franchise agreement, or before becoming bound by a preliminary agreement to proceed. This is a membership requirement, not a disclosure law applying to every franchisor.

Ask your lawyer to compare the disclosure document, fee schedule and agreement. Check whether charges can be changed through the operating manual and whether any limits, notice requirements or dispute procedures apply. Do not assume a reassuring sales explanation overrides the signed terms.

Practical takeaway: Before committing, obtain a complete fee schedule and worked royalty calculations. Sign only when your advisers can explain both the contractual obligation and its effect on your cash flow.