Buying a franchise: how to calculate and negotiate royalties

A seemingly low percentage can conceal a substantial monthly commitment. Before joining a franchise network in Portugal, it is not enough to ask how much the franchisor charges in royalties: you need to understand what they are calculated on, when they fall due and whether minimum payments apply. This analysis helps you compare offers and avoid discovering costs on your first invoice that were unclear during negotiations.

1. Identify the formula, not just the percentage

Royalties are recurring payments for the continued use of the brand and business concept, and may also cover services specified in the contract. They can take the form of a fixed fee, a percentage of turnover or a combination of both. There is no single formula that applies to every franchise.

Ask the franchisor for a written explanation of the calculation and a sample invoice. The proposal should answer four questions:

• What is the percentage rate or fixed fee?
• What amount is the percentage applied to?
• Is there a minimum payment, even if there are no sales?
• Are there tiers, caps or rules for adjusting the fee?

Royalties on sales are not royalties on profit. If the fee is based on turnover, a payment may be due even when the outlet is making a loss. With a fixed fee, falling sales do not automatically reduce the charge either.

Also check what the fee covers. Software, technical support and other services may be included or charged separately. The aim is to identify the actual contractual cost, rather than assume that everything falls under the same heading.

2. Define exactly what counts as turnover

Terms such as ‘gross sales’, ‘revenue’ and ‘turnover’ need sufficiently precise contractual definitions. Do not accept a verbal explanation during a sales presentation as the sole way of resolving an ambiguity.

Ask for clarification on how the following are treated:

• VAT included in the prices charged to customers;
• discounts, returns, cancellations and credit notes;
• sales made through platforms that deduct commission;
• vouchers and gift cards, distinguishing between issue and redemption;
• sales that have been invoiced but not yet paid for;
• online orders allocated to your outlet.

For a sale through a platform, for example, the money you receive may be less than the price paid by the customer. It is essential to know whether the royalty is calculated on the sale price or the amount remaining after commission. Neither approach should be assumed without reading the contract.

Create a simple spreadsheet with hypothetical transactions and ask the franchisor to confirm the results. Include a standard sale, a return and a sale through an intermediary. This test reveals differences in interpretation before they become invoice discrepancies.

3. Test minimum payments, adjustments and payment dates

Once the formula is clear, apply it to months with different sales levels. The aim is not to validate the franchisor’s sales forecasts, but to understand how the payment obligation works in specific situations.

If there is a monthly minimum, calculate its effective share of turnover: divide the royalty due by sales for the period. When sales fall, that share can rise substantially. Also check whether the minimum applies from signing, from opening or after an agreed introductory period.

Read the adjustment rules just as carefully. Identify the index used, how often adjustments are made, the date of the first review and any scope for unilateral changes. Any promise that fees will remain unchanged should appear in the contract, not just in a sales message.

Finally, map out the timetable: the sales reporting date, invoice issue date, payment due date and any adjustment for subsequent returns. If you have to pay royalties before receiving payment from customers, factor that timing gap into your cash-flow planning. Check the VAT treatment with your accountant, particularly if the franchisor is based in another country.

4. Negotiate a clause you can check under Portuguese law

Portugal has no specific franchising law or dedicated statutory regime for pre-contractual disclosure. General contract law applies, including the Portuguese Civil Code. Article 227 sets out the duty to act in good faith during negotiations; the absence of a mandatory disclosure form does not remove those duties.

Standard contract terms are also subject to Decree-Law No. 446/85, where applicable, particularly its requirements concerning communication and the provision of information. The European Code of Ethics for Franchising is a self-regulatory reference, not a law that sets fees or replaces legal review.

You can propose an introductory reduction, a gradually increasing minimum payment or objective rules for fee adjustments. However, there is no automatic right to these terms: they must be agreed.

Ask for the contract to specify how to challenge a calculation, correct errors and settle discrepancies. A disagreement should not be treated as automatic permission to suspend payments; seek legal advice before taking action.

Practical takeaway: before signing, make sure you can reproduce the royalty calculation without the franchisor’s help. If the formula, calculation base or payment deadline is unclear, ask for more precise wording and have it reviewed by a solicitor and an accountant.