Buying a NZ Franchise: Check How Royalties Are Calculated

A franchise royalty is the ongoing payment for rights and services provided under the franchise arrangement. But comparing brands by their headline royalty percentage can be misleading. Within New Zealand’s franchising community, agreements can use different charging methods and definitions of sales. Before buying, establish precisely what you will pay, on which transactions and when—even if the business makes no profit.

1. Identify the charging method and sales definition

Start with the franchise agreement and its fee schedule, rather than a sales brochure. A royalty may be a percentage of turnover, a fixed payment or a combination of charges. Some agreements may also impose a minimum payment. Do not assume every brand uses the same model.

For a turnover-based royalty, the definition of terms such as gross sales, gross revenue or turnover is as important as the percentage. Ask your lawyer and accountant to read that definition together.

Work through these questions:

• Is turnover calculated before or after GST?
• Are refunds, cancelled orders and customer discounts deducted?
• Are delivery charges and other amounts collected for third parties included?
• Are gift vouchers counted when sold, when redeemed or under another rule?
• Are unpaid invoices included before the customer pays?
• Does the definition capture online orders fulfilled by your business?

These are points to verify, not assumptions about what a contract should say. The aim is to avoid paying on amounts you did not expect to count, or counting the same transaction twice.

Request a worked royalty statement using representative transactions. A clear calculation is more useful than an assurance that the fee is straightforward.

2. Trace the money through each sales channel

The amount a customer spends is not necessarily the amount your business receives. This matters where sales involve delivery platforms, booking services, payment processors or central collection by the franchisor.

For example, an intermediary might deduct its commission before transferring the balance to you. If the franchise agreement calculates royalties on the original customer sale, the royalty could apply before that commission is deducted. A smaller bank deposit would not necessarily mean a smaller royalty bill.

Ask the franchisor to show the payment trail for each channel you expect to use:

1. What does the customer pay?
2. Who receives the payment first?
3. Which charges are deducted before settlement?
4. What amount is reported as royalty-bearing turnover?
5. When does the remaining money reach your account?

Also establish how returns and chargebacks are corrected after a royalty has already been paid. Does the next statement provide a credit, or must you submit a separate claim?

For an existing franchise, request historical royalty statements and reconcile a sample against sales reports and accounts, with appropriate permission. Investigate differences rather than treating the seller’s past payments as proof of your future obligations: your proposed agreement may contain different terms.

3. Check minimums, increases and collection rights

A percentage charge usually moves with the relevant sales figure, but a minimum royalty can remain payable during a quiet trading period. Establish whether any minimum applies weekly, monthly or annually, and whether it changes after an introductory period.

Check for fixed administration or technology charges collected alongside royalties. Keep these separate in your comparison so that a low headline percentage does not conceal a higher total recurring cost.

Ask your lawyer to identify:

• Any right to change the royalty rate or introduce additional charges.
• Indexation provisions and the dates on which increases take effect.
• Payment deadlines and direct-debit permissions.
• Interest or administration charges for late payment.
• Reporting duties, audit rights and responsibility for audit costs.
• The process for correcting or challenging a calculation.

Do not assume you can withhold a disputed payment without consequences. Have your lawyer explain the contractual procedure before a disagreement arises.

Your accountant should then map payment dates against customer receipts. A royalty charged on invoiced sales can fall due before the corresponding cash arrives.

4. Understand the New Zealand legal position

New Zealand has no franchise-specific legislation prescribing royalty rates or standard royalty calculations. There is also no general statutory franchise disclosure regime. The agreement therefore needs close scrutiny before you commit.

General laws still apply. The Fair Trading Act 1986 prohibits misleading or deceptive conduct and unsubstantiated representations. The Contract and Commercial Law Act 2017 provides rules concerning contractual misrepresentation and remedies, including cancellation where the legal requirements are met. Neither makes an expensive royalty arrangement automatically unlawful.

Membership of the Franchise Association of New Zealand (FANZ) is voluntary, but its code requirements apply to members, including pre-contract disclosure obligations. Membership does not replace checking the actual charging clauses or obtaining independent advice.

Practical takeaway: Before signing, obtain a worked royalty statement, reconcile it to the contract and have your accountant check the calculation. You should be able to explain both the fee and its payment timing without relying on the headline percentage.