Franchisee revenue reporting: how to check royalty calculations

If your planned franchise charges royalties as a percentage of revenue, agreeing the percentage alone is not enough. Before recruiting franchisees, the business owner needs to define which sales count towards the calculation, where the data comes from and how errors will be corrected. Transparent reporting underpins trust in a franchise network: franchisees understand the charges, and the franchisor does not have to negotiate every payment separately.

1. Define the calculation base, not just the percentage

Start by mapping the money flows at your own outlet. List every sales channel and payment arrangement: till sales, your website, third-party delivery, business orders paid by bank transfer, subscriptions and gift vouchers. For each, note when a sale takes place, where it is recorded and how much the business receives. This will help identify ambiguities before you roll the model out to an independent franchisee.

The phrase ‘royalties on turnover’ is too vague. The contractual calculation base may differ from receipts into the business bank account, sales recorded at the till and revenue shown in the accounts. You therefore need to agree not only what the measure is called, but also how it is calculated.

Address the following questions separately:

• Is VAT included in the calculation base if the franchisee is required to charge it?
• How are discounts treated, and who funds them?
• Do returns, cancellations and partial refunds reduce the calculation base?
• Is the delivery service’s commission included in the calculation or deducted from it?
• When are advance payments, gift vouchers and prepaid services counted?
• How are duplicate records of the same sale across different systems excluded?

For example, with delivery orders, the order value differs from the amount remitted by the intermediary after deducting its commission. Whichever approach the parties choose must be described unambiguously. Otherwise, the franchisor may calculate royalties on the order value while the franchisee uses the amount actually received.

For gift vouchers, it is particularly important to avoid counting revenue twice: once when the voucher is sold and again when it is redeemed. Specify the point at which revenue is recognised and how refunds are handled. Do not automatically import tax accounting rules into the contractual formula: they serve a different purpose.

2. Set out the rules in the agreement and a schedule

In Russia, commercial concession arrangements — the legal framework used for franchising — are governed by Chapter 54 of the Civil Code of the Russian Federation. Intellectual property matters are also governed by Part Four of the Code. Article 1030 permits various forms of remuneration, including payments based on revenue. However, the law does not prescribe a standard franchisee report or a single method for calculating that revenue: the parties must agree the details.

A commercial concession agreement must be in writing. Under Article 1028 of the Civil Code, the grant of the right to use the bundle of exclusive rights must be registered with Rospatent, Russia’s intellectual property office. Without registration, the grant is deemed not to have taken effect. Putting reporting arrangements in place does not replace compliance with these requirements.

Set out the core calculation terms in the agreement and the technical details in an agreed schedule. The schedule can usefully include a glossary of reporting measures, the formula, a list of data sources, a reporting template and examples of transactions that may cause disagreement. It should form part of the parties’ agreement, rather than being an internal guidance note that the franchisor can change at will.

Specify the reporting period, the deadline for submitting data and the payment deadline. Establish a procedure for correcting a period that has already been closed: whether a revised report is required, when the difference is accounted for and how the parties confirm the recalculation. Agree the consequences of late reporting and late payment separately — these are different breaches.

The right to request supporting documents should also be defined in advance, including the grounds for a request, its scope, the period under review and response deadlines. Do not assume that a right to check the quality of goods or services automatically permits an unrestricted financial audit.

3. Make data collection verifiable but proportionate

Assign a primary data source to each sales channel. For retail purchases, this might be the till system; for delivery, the intermediary’s report; and for business orders, the accounting system and sales documentation. Bank statements help with reconciliation, but do not always show revenue as defined in the agreement: a receipt may be a loan, an advance payment or a transfer between accounts.

At a minimum, the report must allow someone to reproduce the calculation. Include:

• the outlet and reporting period;
• sales by channel;
• agreed exclusions and adjustments;
• the final calculation base and applicable rate;
• the royalty due and explanations of any variances.

Agree who prepares the report, who checks it on the franchisee’s side and who receives it on the franchisor’s side. A backup method of submitting data is needed if the system is unavailable. Also specify how missing information will be recovered after an outage.

Do not collect customers’ personal data simply because the software allows it to be exported. Amounts, dates and transaction identifiers, without customer details, are usually sufficient to check royalties. If personal data does need to be transferred, separately establish the legal basis and each party’s obligations under Russia’s Federal Law No. 152-FZ ‘On Personal Data’.

4. Run a trial reconciliation before selling your first franchise

Test the method using a completed reporting period from your own outlet. Ask two employees to calculate the royalties independently using the proposed instructions. If their results differ, identify the cause: an ambiguous definition of revenue, a missed sales channel, a duplicate entry or an incorrectly processed refund.

Add hypothetical scenarios that did not occur during the selected period, such as a refund for an earlier sale, partial redemption of a gift voucher or a delayed report from an intermediary. Keep an example of the correct calculation, with an explanation, for each scenario.

Then establish a measured process for resolving discrepancies. First, the parties reconcile specific transactions and sources, then record the agreed adjustment. If they cannot agree, they follow the dispute resolution procedure set out in the agreement. A discrepancy alone is not evidence of concealed revenue.

Practical takeaway: before signing the first agreement, prepare a definition of revenue for royalty purposes, a report that allows the calculation to be reproduced and a correction procedure. If two people obtain the same result from the same data, the mechanism is ready to use with franchisees.