How to Assess the Royalty Calculation Base When Buying a Franchise

A seemingly low royalty rate in a franchise offer does not always mean a low payment. What matters most is the amount to which the rate applies: the calculation base defined in the contract. Before entering the Turkish franchise market, reviewing this definition will help you forecast your monthly costs and avoid unexpected charges on the same sales. Treat the review not simply as a negotiation over the rate, but as a check of the calculation from sale through to invoice.

1. Distinguish the legal basis from the commercial terms

A turnover-based royalty is one way of calculating the ongoing fee agreed in a franchise contract for the right to use the franchise system or operate the business. The fee may be linked to sales, set at a fixed amount or combine both approaches. Your first question should therefore be not “What is the rate?” but “What triggers the obligation to pay, and what amount is the fee calculated on?”

Turkey has no dedicated law governing franchise agreements exclusively. Nor is there a general mandatory pre-contractual disclosure document or public registration system specifically for granting franchises. The contractual relationship is governed by the relevant general provisions, principally the Turkish Code of Obligations No. 6098 and the Turkish Commercial Code No. 6102. Law No. 4054 on the Protection of Competition is also relevant to arrangements that restrict competition.

The legislation does not prescribe a single royalty rate or standard calculation base for all franchise relationships. Do not assume that the exclusions you want commercially will apply automatically; negotiate them explicitly. Ambiguous, pre-drafted clauses may also require legal review under the rules on standard terms and conditions. However, clarifying the definition before signing is safer than facing a dispute over interpretation later.

2. Break “turnover” down by transaction type

Terms such as “gross sales”, “net sales” and “total revenue” may not be sufficiently clear on their own. An accounting category may not cover the same items as the calculation base in the franchise agreement. Ask the franchisor to put the definition in writing, specifying which items are included and excluded.

Check the following transactions individually:

• VAT: Is VAT collected from customers included in or excluded from the calculation base?
• Returns and cancellations: If a completed sale is subsequently refunded, which period’s calculation base will be reduced?
• Discounts: Is the royalty calculated on the listed price or the discounted selling price?
• Gift cards: Is the amount counted when the card is sold or when it is redeemed?
• Advance payments: How are payments for goods or services not yet supplied treated?
• Additional income: Under what conditions are delivery charges or similar customer payments included?

Adapt this list to the way the business actually makes sales. For example, if a gift card is sold at one branch and redeemed at another, ask whether the same amount enters both businesses’ calculation bases. Agree a clear method for complimentary products and purchases made with loyalty points too. The aim is not to exclude every item, but to understand which amounts are included and why.

3. Do not confuse platform payouts with sales

The amount an online ordering platform pays into your account may differ from the sales price paid by the customer. Commission, delivery services, promotional contributions and other deductions can reduce the amount reaching your bank account. Nevertheless, the contract may calculate the royalty on the sales price before those deductions.

Do not therefore treat “I should not pay a royalty on money I never receive” as a contractual right. Have the agreement state explicitly whether platform commission is deductible from the calculation base. This needs to be assessed in light of the parties’ agreement and the particular relationship.

For promotions, also distinguish who funds the discount. A discount funded by your business may be treated differently from a contribution funded by the platform or franchisor. The customer’s payment, any additional payment to the business and the platform’s deductions should appear as separate line items.

Ask the franchisor to calculate the royalty using a sample platform statement. Have your accountant calculate it independently using the same example. If the results differ, the problem is not just arithmetic: the definition or supporting documentation is incomplete. Resolve the discrepancy before entering into the agreement.

4. Make minimum fees and accounting periods explicit

Some offers provide for a minimum monthly fee alongside a sales-based royalty. There are two different structures here: paying the higher of the calculated royalty and the minimum fee, or adding a fixed fee to the royalty. Even if the offers use similar wording, the costs are not the same.

Answer the following questions in a single calculation schedule:

• Is the minimum fee offset against the royalty, or paid in addition to it?
• How is it calculated for partial trading periods, such as the opening month?
• Do payments continue during temporary closures or months with no sales?
• If a turnover threshold is exceeded, does the new rate apply to all sales or only to the amount above the threshold?
• If there is an annual adjustment, how are monthly payments reconciled against it?

Keep the treatment of VAT within the sales calculation base separate from the tax treatment of the invoice the franchisor issues for its own service fee. Check with your accountant whether the fee stated in the contract includes or excludes taxes.

5. Test the calculation together before signing

Prepare three sample months: one with normal sales, one with a high volume of returns and one involving a platform promotion. For each, work from the sales records through to the calculation base, the applicable rate and the amount payable. Confirm that the examples produce the same result as the actual contractual clause.

Put the reconciliation process in writing too: which reports must the business submit, and when? How will the franchisor share the calculation breakdown? In which period will errors or late returns be corrected? Access to the breakdown and the procedure for challenging it should not be left to a vague statement that “head office records shall prevail”. Address separately how a challenge affects the obligation to pay; do not assume that raising a dispute automatically suspends payment.

Practical takeaway: Before signing, prepare a one-page definition of the calculation base and a worked example that gives both parties the same result. Only then compare the rate with offers from other brands on a consistent basis.