Buying a franchise: check how royalties are calculated

A seemingly low royalty rate can conceal a substantial financial obligation if it applies to amounts your outlet never actually receives. Before joining a franchise network in Portugal, do not simply compare rates: check the calculation basis, exclusions, minimum payments and verification procedures. This will help you understand exactly what you will be required to pay.

1. Identify everything included in the calculation basis

Royalties are payments for the ongoing use of the business concept and rights provided by the franchisor, on the agreed terms. They may take the form of a percentage, a fixed amount or a combination of both. There is no single statutory formula that applies to all franchise agreements.

Ask for the contractual definitions of terms such as ‘turnover’, ‘gross sales’ and ‘net revenue’. Do not assume they mean the same thing as they do to your accountant or in your invoicing software.

The definition should clarify at least the following:

• VAT: does the percentage apply to sales including or excluding tax?
• Discounts and promotions: is the calculation based on the advertised price or the amount actually invoiced?
• Returns and cancellations: how and when are these deducted?
• Credit sales: does the royalty become payable when the sale is invoiced or only once payment is collected?
• Vouchers and gift cards: are these counted when sold, when redeemed or at another point, without double counting?
• Delivery platforms and intermediaries: is the calculation based on the price paid by the customer or the amount received after commission?

For example, if a platform deducts a commission, the network may still require royalties on the full sale value. This is not the same as calculating them on the amount transferred to your outlet. What matters is understanding the rule before you commit.

2. Look for minimum payments, combined charges and future changes

A percentage rate alone does not reveal the total obligation. Check whether there is a minimum monthly royalty, even when your outlet's sales are too low to reach that amount.

Distinguish between two arrangements: paying whichever is higher, the percentage-based amount or the minimum, and paying a fixed component plus the percentage-based amount. Unclear wording can conceal significant differences.

Also check:

• When charges begin: on signing, on opening or following another specified event.
• How partial months and periods of closure are treated.
• Whether there are sales bands and whether a higher rate applies only to sales above the threshold or to all sales.
• The rules for adjusting fixed amounts and how often adjustments can be made.
• Any additional charges for IT systems, payment processing or administrative services.

Separate these charges from royalties, even if they appear on the same invoice. Also identify the VAT applicable to the payments themselves: do not confuse this with whether VAT is included in or excluded from the sales calculation basis.

Ask your accountant to model scenarios involving low sales, normal trading and greater use of intermediaries. The aim is not to validate a promise of profitability, but to test whether the contractual formula works as it has been presented.

3. Understand the legal limits in Portugal

Portugal has no specific franchise law, nor does franchise-specific legislation impose a universally required format or delivery deadline for a pre-contractual disclosure document. This does not mean there is no legal protection.

Article 405 of the Portuguese Civil Code establishes freedom of contract within the limits of the law. Article 227 requires good faith during negotiations and the formation of the contract; Article 762(2) requires good faith in performing obligations and exercising rights.

Where standard contract terms are used, Decree-Law No. 446/85 of 25 October, as amended, applies. This framework imposes duties to communicate terms and provide information, and regulates prohibited clauses, including in business-to-business relationships. A clause is not necessarily valid simply because it appears in a signed contract.

The European Code of Ethics for Franchising is a self-regulatory benchmark, not a Portuguese law of general application. Check whether the franchisor is bound by the code and on what basis.

Seek legal review, particularly of provisions allowing unilateral changes to rates, retrospective charges and restrictions on challenging charges. Do not assume you have a general cooling-off right of the kind available for consumer purchases: joining a franchise is normally a business transaction.

4. Make sure you can check and challenge charges

Before signing, request a worked royalty calculation using fictional or anonymised data. You should be able to trace the calculation from recorded sales through exclusions and the rate applied to the amount invoiced.

The agreement should clarify who supplies the data, what supporting documents are required and how errors are corrected. Also check the audit conditions: advance notice, access to records, confidentiality and responsibility for costs.

Negotiate a written procedure for disputes, including a response deadline and a process for adjusting amounts. Raising a complaint does not automatically suspend your obligation to pay; clarify this point with your lawyer before withholding any payment.

Practical conclusion: only accept the formula once you can reproduce the calculation using your own records. A comprehensive definition, supported by examples consistent with the agreement, is worth more than an attractive percentage on its own.