Franchising in Portugal: defining the basis for royalty calculations

When turning an existing business into a franchise offering, choosing a royalty percentage is not enough. You need to define which amounts it applies to, when the payment obligation arises and how to correct errors. In franchising, a clear calculation basis helps prevent unexpected charges and ensures that franchisor and franchisee work to the same criteria.

1. Choose the royalty model before writing the formula

Ongoing royalties can take the form of a fixed fee, a percentage of a defined sales base, or a combination of the two. The choice should reflect how the business actually operates, rather than simply copying what another brand advertises.

A fixed fee makes royalty income easier to forecast, but places a proportionately greater burden on the franchisee in quieter months. A percentage tracks changes in sales, although it requires a precise definition of the calculation basis. A model with a monthly minimum maintains a charge even when business slows down; this effect should be understood before signing.

Keep royalties separate from other charges. The initial franchise fee, marketing contributions, product purchases and any additional services should not be bundled into a single unexplained charge. Identify the purpose of each payment and avoid charging separately for a service described as being included in the royalties.

Before finalising the model, apply it to the existing business’s historical data. Compare high-demand months, quiet months and periods with substantial returns. The aim is to establish whether the rule is workable and understandable, not to promise results to a prospective franchisee.

2. Define what is included and what is excluded

Terms such as ‘turnover’, ‘gross sales’ and ‘revenue’ can be interpreted differently. The agreement should set out its own calculation basis, precisely enough for two people to reach the same result without having to negotiate the treatment of each transaction.

Prepare a list of decisions:

• VAT: state explicitly whether it is excluded from the calculation basis. Do not confuse VAT on the outlet’s sales with the tax treatment of the royalty charge itself.
• Discounts: clarify whether the calculation uses amounts before or after discounts, and how promotions co-funded by the franchisor are treated.
• Returns and cancellations: specify which documents support a deduction and the period in which it is made.
• Intermediary platforms: decide whether the platform’s commission reduces the calculation basis or is simply a cost borne by the franchisee.
• Vouchers and gift cards: choose a point of inclusion that avoids counting both the sale of the voucher and its redemption.
• Credit sales: distinguish between invoicing and receipt of payment, and establish how unpaid amounts are treated.

For example, if a platform transfers the payment for an order after deducting its commission, the money received does not necessarily equal the sales value relevant to royalties. The contractual formula should resolve that difference.

Also include an allocation rule for transactions involving more than one outlet. This definition serves to calculate the fees due under the agreement; it does not replace the applicable accounting or tax rules.

3. Set the calculation period and correction process

Even a sound formula can lead to disputes if the timetable is unclear. Specify the calculation period, the deadline for submitting information, when invoices are issued and when payment falls due. Distinguish each stage rather than simply referring to ‘monthly payment’.

Set out how to handle a return made after the month of the original sale. The adjustment could, for example, be reflected in the next calculation, supported by appropriate documentation. What matters is that the procedure is agreed and allows both the original transaction and the corresponding adjustment to be traced.

Test the rule using a small set of properly anonymised real transactions: a straightforward sale, a discounted sale, a late return and a transaction through an intermediary. Ask two people to perform the calculations independently. Different results reveal an incomplete definition.

Keep a calculation record accessible to both parties. When checking the calculation basis, prioritise aggregate figures and document references; do not collect customers’ personal data unnecessarily for this purpose.

4. Place the formula within the Portuguese legal framework

Portugal has no specific franchising law prescribing a mandatory royalty formula. Applicable provisions include the Portuguese Civil Code’s general rules on freedom of contract and good faith, including during negotiations, and, where applicable, the rules on standard contract terms established by Decree-Law No. 446/85.

The relationship must also comply with competition law, including Law No. 19/2012 and the applicable European rules. Freedom to set fees does not remove these limits.

The European Code of Ethics for Franchising is a self-regulatory instrument, not a Portuguese law of universal application. It does not replace legal review of the clause or verification of the tax treatment of invoicing.

Next steps: prepare a summary setting out the formula, inclusions, exclusions, timetable and examples of corrections. Have it reviewed by a lawyer and an accountant, and incorporate the agreed rules into the contract before recruiting franchisees.