Buying a franchise: check how centralised customer payments work

When you buy a franchise, you join a network, but you run your own business with its own payment obligations. If customers’ money first passes through the franchisor or a shared payment system, you need to understand the entire payment process. A recorded sale does not always mean the money is available in your account. Check how payments are handled before you sign.

1. Follow the money from the customer to your account

Start by asking whether your business receives customer payments directly or whether someone else receives them and then pays you your share. Different sales channels may have different arrangements: purchases on your premises, orders through the franchise network’s website and sales through third-party platforms each need to be reviewed separately.

Ask for a written description of each payment flow. It should show:

• which company sells to the customer and is named on the receipt or invoice,
• who receives the payment,
• what role the franchisor and any payment service providers play,
• how the sale is attributed to your particular business,
• when and on what terms the money is passed on to you.

Distinguish between someone administering payments on your business’s behalf and another company selling to the customer and then paying you. The arrangement affects the records you need and which parties your business can make claims against.

Ask an accountant to check that the description provides a workable basis for bookkeeping and VAT reporting. A shared brand does not, in itself, establish who the seller is in an individual transaction.

2. Check payout dates and deductions

Request an anonymised example of a settlement statement: the summary showing how sales translate into a payout. Trace a single customer payment through the records. You should be able to understand the sale amount, every deduction and the amount finally transferred to your account.

In particular, check whether centrally charged fees, refunds, customer claims or other amounts owed can be deducted before you are paid. The issue is not just how a fee is calculated, but whether the other party can collect payment directly from your sales revenue.

Ask for clear answers to the following:

• Are there fixed settlement periods and payout dates?
• How are public holidays and late payments handled?
• Can money be withheld as a reserve, and when must that reserve be released?
• Can the franchisor offset a claim against your payout even if you dispute it?
• How do you report errors, and when must they be corrected?

Also test what happens when a sale is refunded after you have already received the payout. Will the amount be deducted from the next settlement or invoiced separately? Could this create a negative balance that you must pay immediately?

Then enter the actual payout dates in your cash flow forecast. Do not use the sale date as the payment date if the contract says otherwise. Also assess how a delayed settlement would affect your ability to pay wages, rent and suppliers.

3. Assess the risk when someone else holds the money

If someone else holds customers’ money, you need to consider what happens if payments stop or that party goes bankrupt. Do not assume the money is protected simply because the settlement statement attributes it to your sales.

Ask where the funds are held, whether they are kept separate from the recipient’s own money and what legal protection actually exists. Separate entries in an internal system are not the same as established protection in bankruptcy. Have a lawyer assess the arrangement and the relevant contracts; protection may depend on how the payment handling is organised in practice.

Also check which parties you have a direct contract with. If the franchisor engages the payment service provider, your ability to demand payment or information directly from that provider may be limited.

Ask for a procedure covering disruptions: how will you be notified, who will investigate missing funds, and is there an authorised alternative payment route? A backup arrangement needs to work both contractually and in practice. You should not have to improvise payment procedures once your business is already operating.

4. Insist on understandable terms before signing

Sweden has an Act on Franchisors’ Duty to Disclose Information (2006:484). Well before the franchise agreement is entered into, the franchisor must provide clear, understandable written information about what the agreement entails and other relevant circumstances. This information must cover, among other things, fees and other financial terms of the franchise operation.

If centralised payment handling is part of the arrangement, you should therefore ask for payout terms, deductions and significant payment risks to be explained before signing. However, the disclosure legislation does not itself guarantee that customer funds are protected or that payouts will be made on a particular date. Contractual matters are also assessed under general legal rules, including the Swedish Contracts Act.

Make sure you can review the payment terms even if they are contained in a separate agreement with a service provider. Ask your adviser to check who can change payout schedules or reserve requirements, and what this means for your business.

Practical takeaway: Do not sign until you can trace a customer payment all the way to your account, explain every possible deduction and assess the risk if the payout does not arrive.