Turnover-based franchise fees: how to check the calculation basis

When comparing franchise opportunities, it is easy to focus on the ongoing fee rate. Yet the amount to which that rate applies is just as important. An imprecise definition of turnover could mean you pay fees on returned purchases, unfulfilled orders or money your business never received. Before signing the agreement, check not just the rate but the entire calculation and payment process.

1. Establish what the agreement means by turnover

The terms ‘turnover’, ‘revenue’ and ‘sales’ should not be used interchangeably in the agreement without explanation. Simply referring to a till report is not enough either: the report may not cover every sales channel, or its figures may differ from the calculation basis agreed by the parties.

Ask for clear answers to the following questions:

• Is the fee based on sales including or excluding VAT?
• Is a sale counted when an invoice is issued, a service is performed, goods are handed over or payment is received?
• Are discounts, returns and cancelled transactions taken into account?
• Are delivery charges paid by the customer included in the calculation basis?
• Does the fee cover all business revenue, or only sales made through the franchise?

Distinguish between the basis used to calculate the fee and any tax added to the fee itself. The wording ‘net fee’ does not establish that the percentage is calculated on sales excluding VAT. These two points need to be defined separately.

If you also run activities outside the franchise network, make sure their revenue is excluded and agree how it will be recorded separately. Do not leave this to head office to interpret later.

2. Check returns, discounts and payments through intermediaries

The calculation should reflect what actually happens in each transaction, including when a sale is adjusted in a later month. Establish when a return reduces the fee calculation basis, what documents are required and what happens if adjustments exceed current sales. The agreement should also address the final settlement of adjustments after the franchise relationship ends.

Orders handled through online platforms need particular attention. The customer may pay the full price, while the amount reaching your account is reduced by the platform operator’s commission. That bank transfer is not necessarily the basis for the franchise fee. If the agreement refers to the sales value before commission is deducted, you will bear both charges separately.

Also check:

• Gift vouchers: does the fee arise when the voucher is sold or when it is redeemed? Double charging must be avoided.
• Discounts funded by head office: is the fee based on the price paid by the customer, or does it also include the contribution received from the franchisor?
• Unpaid invoices: do you owe the fee even if the customer has not paid, and is a later adjustment allowed?
• Customer complaints and payment reversals: who must report the adjustment, and by what deadline?

Do not assume that accounting rules automatically produce an outcome in your favour. The fee mechanism must be set out in the agreement.

3. Test the calculation using a sample month

Before accepting the terms, ask the franchisor for a worked example based on the draft agreement. This is not about forecasting profitability, but about checking the formula used to calculate a specific payment obligation.

Prepare a set of hypothetical transactions: an on-site sale, an online order subject to platform commission, a discounted sale, a return relating to a purchase from the previous month and a voucher redemption. For each item, both parties should identify the amount included in the calculation basis and the relevant accounting period.

Then check any additional mechanisms: minimum fees, percentage bands, treatment of a partial month and any annual reconciliation. If there is a minimum fee, establish whether it replaces the percentage-based fee when that figure is lower, or is an additional charge.

The best outcome of this test is a jointly agreed example attached to the agreement. It will not replace a precise definition, but it can help expose inconsistencies and reduce the scope for later disputes.

4. Agree on reporting and error correction

Even a good definition of turnover is not enough if the parties use different data. Agree on the source of the report, the submission deadline, who is responsible for approving it and the procedure for challenging a fee calculation.

Check whether you can access the data head office uses to issue its invoice. The ability to download transaction and adjustment histories also matters after the agreement ends. If the network’s system generates the report, you need a procedure for system failures or sales being allocated to the wrong outlet.

Any right to audit fee calculations should specify the scope of the documents that may be inspected, confidentiality requirements and the costs of verification. Access to all of your company’s accounting records may go beyond what is needed to check the fee. Also agree how overpayments and underpayments will be settled, and whether raising an objection affects the payment deadline for the disputed amount.

5. Bear Polish law in mind

Poland has no separate statute governing franchise agreements, nor a general, franchise-specific requirement to provide a prospective franchisee with a disclosure document 14 days before signing. Voluntary codes of conduct are not legislation, and proposed rules should not be treated as law already in force.

Under Polish law, a franchise agreement is an ‘unnamed contract’: it is not a separately defined statutory contract type. It rests on the principle of freedom of contract under Article 353¹ of the Polish Civil Code, subject to limits imposed by legislation, the nature of the legal relationship and the principles of social coexistence. General rules on the performance of obligations and liability for breaches also apply, as do the relevant tax rules when issuing invoices. The absence of franchise-specific legislation does not mean there is no legal protection, but it makes precise contractual terms all the more important.

The practical takeaway: before signing, ask for a definition of the fee calculation basis, a worked example and an adjustment procedure. If the same transactions lead each party to calculate a different amount due, the clause needs revising.