Buying a franchise: how to check royalty calculations

When buying a franchise in Slovenia, comparing monthly royalty percentages is not enough. It is more important to know what amount the royalty is calculated on, when payment is due and how incorrect calculations are corrected. In a responsible franchising community, these rules should be clear to both parties. Before signing, ask for a sample calculation and review it with your accountant against scenarios you expect to encounter in your business.

1. Establish what the agreement counts as turnover

The terms ‘turnover’, ‘sales’ and ‘revenue’ are not precise enough unless the agreement explains what they include. The basis for calculating royalties may differ from the revenue shown in your accounts or the money received into your bank account. A common mistake buyers make is to assume that all these figures mean the same thing.

Ask for a written definition covering at least the following items:

• VAT: whether it is excluded from the calculation basis and how different tax rates are treated;
• discounts: whether the actual selling price after discounts is used;
• returns and credit notes: in which period they reduce the calculation basis;
• gift vouchers and advance payments: whether the royalty becomes payable when the money is received or when the goods or services are supplied;
• unpaid invoices: whether you pay royalties on sales that customers have not yet paid for.

In particular, check whether the agreement covers only the franchised outlet’s business or also other revenue earned by the same company. If you already run another business activity, you need a clear distinction and a way to record the figures separately. Otherwise, an apparently attractive rate could apply to more of your business than you expected.

2. Test online sales and intermediary commissions

For sales through delivery platforms, online marketplaces or the brand’s central online shop, the order value often differs from the amount transferred to the franchisee. An intermediary may deduct its commission before transferring the money, but that does not automatically mean the royalty calculation basis is reduced by the same amount.

The agreement must explain to whom the sale is attributed, who issues the invoice and which data are used for the calculation. Where the franchisor takes an order and you fulfil it, check whether you pay royalties on the full order value or on the revenue allocated to you under the agreement.

Ask the franchisor to illustrate three scenarios: a direct sale at the outlet, a sale through an external platform and an online order collected in person. Each example should show the sales value, VAT, discounts, commissions, calculation basis and royalty. These are not earnings forecasts, but a test of whether two people can use the same data to arrive at the same result.

Also check how double counting is prevented. An order recorded in the online shop and then again in the outlet’s till system should not attract royalties twice on the same sale without a clear contractual basis.

3. Identify minimum payments and rate changes

The agreement may specify a minimum monthly royalty as well as a percentage rate. Clarify whether you pay the higher of the two amounts or whether the fixed fee and percentage-based royalty are added together. This distinction is particularly important during a slow start or a seasonal fall in sales.

Also ask what triggers the payment obligation: signing the agreement, completing training or actually opening for business. If opening is delayed, it must be clear whether the minimum payment is already due and how a delay for which the franchisor is responsible will be handled.

For tiered rates, check whether a higher rate applies only to turnover above the threshold or to the entire calculation basis. For index-linked adjustments, ask for the specific index, reference period, frequency of adjustment and notification procedure. A vague right to adjust fees in line with ‘business conditions’ makes it harder to assess your obligations.

Prepare a monthly calculation for your accountant to review:

Contractual calculation basis × agreed rate, followed by application of the minimum payment or additional fixed fee as specified in the agreement.

Check the tax treatment of the royalty invoice separately. Particularly where the franchisor is based abroad, your accountant should assess VAT and any other potential tax obligations according to the actual nature of the payment.

4. Agree reporting, checks and corrections

The agreement should specify the reporting deadline, invoice date, payment due date and procedure for disputing an invoice. An appendix should include a sample report and a list of the data you must provide. This will allow you to establish before buying whether your till system and accounting software can produce the required reports without additional manual work.

The franchisor may require checks on the accuracy of royalty calculations. Agree the scope of any review, advance notice, confidentiality safeguards and rules on who pays the costs. Do not accept an unclear clause under which you automatically pay for every review, regardless of its findings.

The rules must work both ways: undercharged royalties should be paid, while overcharges should be refunded or offset under an agreed procedure. Specify how subsequent customer refunds will be treated, the deadline for corrections and how the disputed part of an invoice will be handled. Raising a dispute does not, in itself, mean you can withhold payment without consequences.

5. Take account of Slovenia’s legal framework

Slovenia has no dedicated franchising law, no specific compulsory franchise register and no prescribed standard pre-contractual disclosure for franchise purchases. Nor is a franchise agreement specifically regulated as a separate type of contract under Slovenia’s Code of Obligations. Its general rules apply to contractual obligations, including the principle of good faith and fair dealing and the rules on performance and liability for breach.

The Value Added Tax Act (ZDDV-1) is among the relevant laws for tax matters. The European Code of Ethics for Franchising is a self-regulatory standard for the franchising community, not Slovenian law. Check whether the franchisor commits to following it and how that commitment is incorporated into the contractual relationship.

Practical takeaway: before signing, obtain a clear definition of the calculation basis, a sample monthly calculation and written correction rules. If you cannot independently reproduce the calculation, clarify the agreement first and only then accept the payment obligation.