Franchise royalties: how to check the calculation

A seemingly low percentage can become a substantial financial commitment if it is applied to a poorly defined calculation base. Before joining a franchise network in Spain, it is not enough to ask how much the brand charges: you need to understand how the ongoing royalty is calculated, which transactions it covers and when the money leaves your account.

1. Identify what you are required to pay

The ongoing royalty is a recurring fee agreed with the franchisor. It may be a fixed amount, a percentage of specified sales or a combination of the two. There is no single statutory rate, and not all brands use the same structure.

Distinguish it from the initial franchise fee, advertising contributions and other services invoiced by head office. The fact that several charges appear together in a sales presentation does not mean they serve the same purpose or follow the same rules.

Ask for a breakdown showing, for each charge:

• Its exact name and the clause governing it.
• The calculation formula and how often it is calculated.
• The date from which it starts to accrue.
• Any minimum amounts payable.
• The applicable taxes and payment due date.

Pay particular attention to whether the royalty starts accruing when you sign, when you open or after an initial period. If a discount applies, ask for its duration and the conditions for retaining it to be recorded in writing. A temporary reduction should not be confused with the standard cost under the agreement.

2. Define the calculation base: invoiced sales are not always money received

The phrase ‘percentage of sales’ is insufficient unless it explains what counts as sales. The agreement should allow you and head office to reach the same result using the same data.

Check whether the calculation base excludes Spanish VAT (IVA) and how it treats discounts, returns, cancellations and unpaid transactions. Also check whether it uses amounts invoiced or payments actually received. If royalties are payable on outstanding invoices, you will be paying out before the customer has paid you.

Raise specific scenarios relevant to the business:

• Discounts: is the royalty calculated on the original price or the final amount paid?
• Returns: is the royalty calculation for the month of the sale corrected, or is the adjustment deducted in the following month?
• Vouchers and gift cards: does the amount count when they are sold or when they are redeemed, without being counted twice?
• Third-party platforms: does the platform’s commission reduce the calculation base, or is the royalty applied before that commission is deducted?
• Sales handled by head office: what amount is allocated to the outlet, and on what basis?

For example, if a platform retains a commission, the money received will be less than the price paid by the customer. This does not automatically mean the royalty is calculated on the net amount received: that must be agreed.

Ask for an anonymised or illustrative royalty statement covering several of these transactions. It is more useful than a verbal explanation of the percentage.

3. Check minimum payments, adjustments and verification rights

A monthly minimum may be payable even when sales are low. Confirm whether it replaces the percentage-based charge when that charge is lower, or whether it is added on top. These are different financial arrangements and must be expressed unambiguously.

Also examine what happens during temporary closures, delayed openings or interruptions to trading. Do not assume that a pause in sales automatically suspends payment of a fixed fee.

If charges can be adjusted, identify the index or criteria used, the frequency, the reference date and any limits. Avoid accepting generic references to ‘current rates’ without understanding how those rates can change.

Sales verification deserves a separate review. Clarify which records head office can inspect, how often and who bears the cost of an audit. Access should be relevant to verifying the royalty calculation and comply with data protection obligations where personal information is involved.

Finally, agree a procedure for correcting errors: the deadline for reporting discrepancies, the supporting documents required and how overpayments will be refunded or credited. Check what happens to disputed amounts while they are under review.

4. Test the formula before signing

In Spain, Article 62 of Law 7/1996 on the Regulation of Retail Trade and Royal Decree 201/2010 govern aspects of franchising. Pre-contractual information must be provided in writing at least twenty working days before the contract or preliminary agreement is signed, or before any payment is made to the franchisor.

This information must include the essential terms of the agreement and the fees and other financial obligations. However, receiving it is no substitute for reviewing the specific royalty formula. The agreement is also subject to general rules of contract law, including the relevant provisions of Spain’s Civil Code and Commercial Code.

Compare the sales presentation, the pre-contractual information and the agreement, including its schedules. If they differ, ask for a consistent version before committing. Then ask your adviser to reproduce a complete royalty calculation and check its tax treatment.

Practical tip: do not settle for a percentage alone. Insist on a written formula that allows every royalty statement to be calculated, checked and corrected without relying on later interpretations.