Franchising in Portugal: setting sustainable fees and royalties

Turning an existing business into a franchise network takes more than choosing a percentage of sales. The fees must cover the support promised, allow franchisees to run viable businesses and sustain the network’s growth. Before presenting terms to prospective franchisees, build a fee structure based on verifiable costs, clear responsibilities and cautious forecasts.

1. Separate initial costs from ongoing support costs

Start by identifying the work your company will need to carry out for each new opening. Do not confuse the investment needed to establish the network with the cost of bringing a franchisee on board.

The initial franchise fee may cover access to the business concept and brand, initial training and help with setting up. Draw up a specific list of what is included: training hours, travel, site assessment, system configuration and support at launch. Also state what will be invoiced separately.

Royalties, meanwhile, should relate to the ongoing relationship: use of the network’s assets, operational support, updates to working methods and other services specified in the contract. Estimate the annual cost of these obligations, including the time of staff who currently juggle several roles within the company.

Organise your calculations into three categories:

• Onboarding: resources used before and during the opening.
• Ongoing support: assistance, visits, continuing training and shared tools.
• Central operations: network management, quality control and development of the business concept.

Do not rely indefinitely on new initial franchise fees to fund support for existing franchisees. That dependence leaves the network vulnerable when the pace of new openings slows.

2. Choose a formula that works for both parties

A percentage-based royalty tracks changes in sales, but requires a precise definition of the calculation basis. A fixed fee makes the franchisor’s income easier to forecast, but places a proportionately greater burden on franchisees when their turnover falls. A hybrid formula can combine both, provided its complexity does not make the charges difficult to check.

Do not choose a rate simply because another brand uses a similar one. Businesses with different margins, support needs and processes cannot necessarily sustain the same terms.

Prepare a projected profit and loss statement for the future franchised outlet. Include purchases, staff, rent, energy, insurance, maintenance, remuneration for whoever manages the outlet and all payments to the network. Add a cash flow forecast that takes account of the initial investment, financing and seasonality.

Test at least the following scenarios:

• Lower-than-expected sales and slower growth.
• Higher staffing or raw material costs.
• A need for additional support during the launch period.
• Fewer outlets opening than the central team has planned for.

Consider both perspectives: can the franchisee still cover expenses and reinvest? Can the franchisor deliver the contracted support? If the answer always depends on the most favourable scenario, review the formula, costs or proposed support before recruiting.

3. Make every charge verifiable

A seemingly simple percentage can lead to disputes if it is unclear which amounts it applies to. Define how VAT, discounts, returns, cancellations, vouchers, platform sales and orders split between channels or outlets will be treated.

For example, if a platform deducts a commission before transferring the money, clarify whether the royalty is calculated on the sale to the customer or on the amount received. Neither party should discover that difference on the first invoice.

For each charge, record:

• Its purpose, formula and frequency.
• The documents used to calculate the amount due.
• The sales reporting date and payment deadline.
• The procedure for correcting errors and verifying data.
• The terms for adjusting the charge, where applicable.

Treat the marketing contribution separately. Specify eligible expenses, how funds will be managed, reporting arrangements and what will happen to any remaining balances. Clarify whether franchisees must also spend money on local advertising. Do not present the contribution as a guarantee of commercial returns or of equivalent spending at every location.

4. Ensure the terms comply with Portuguese law

Portugal has no specific franchising law or dedicated register of franchisors. Fees are negotiated contractually, subject to the generally applicable legal rules; there is no statutory scale of royalty rates.

The Portuguese Civil Code provides for freedom of contract, notably in Article 405, and good faith in negotiations and performance under Articles 227 and 762. Explaining material charges is therefore more than a commercial courtesy. The absence of a legally prescribed franchise disclosure document does not remove the general duties of disclosure and good faith.

Where standard contract terms are used, Decree-Law No. 446/85 applies, including its duties to communicate terms and provide information. Portuguese and EU competition rules also apply. The European Code of Ethics for Franchising is a self-regulatory instrument, not national law.

Have the financial terms reviewed by a legal adviser and ask an accountant to confirm their tax treatment, including the applicable VAT. Avoid copying tax rates or clauses from foreign contracts.

Practical conclusion: before recruiting franchisees, prepare a fact sheet for each charge, test viability for both parties and confirm that the contract precisely reflects the support you can deliver.