How to Calculate Franchise Royalties and Set Them Out in the Agreement

When converting your existing business into a franchise model, setting the ongoing royalty as a percentage is not enough. The same rate can produce different payment obligations depending on how turnover is defined. In a well-run franchise network, the franchisor and franchisee know from the outset which sales count towards the calculation and in which period. This guide focuses on turning turnover-based royalties into contractual arrangements that both parties can calculate and verify.

1. Establish the commercial rationale before setting the rate

A royalty is a recurring fee charged for the use of the rights specified in the agreement and the continuing franchise relationship. It does not necessarily serve the same purpose as the initial franchise fee. Consider one-off work at launch separately from activities carried out throughout the relationship, so that you do not inadvertently charge twice for the same cost.

Start by building a spreadsheet using your business’s actual income and expenditure. Assess whether the franchisee can afford the royalty after rent, staff, products, energy and other operating costs. From the franchisor’s perspective, consider whether the total expected fees will cover the cost of ongoing services.

You can compare three structures:

• Turnover-based fee: Varies with sales volume and requires a clearly defined calculation base.
• Fixed recurring fee: Offers predictability but may place a greater burden on the business during periods of low sales.
• Hybrid fee: Combines fixed and variable elements without making the total financial burden difficult to understand.

Model low-sales and high-cost scenarios as well as your expected sales level. If you are considering a minimum fee, decide separately whether it will apply during periods when no sales are made or the business is temporarily closed. A rate you have heard quoted in the market is no substitute for assessing your own business’s financial structure.

2. Define the calculation base by sales category

The phrase “based on monthly turnover” is not enough on its own. Use a separate calculation schedule to show which items make up the amount on which the royalty is charged. It should be possible to reconcile this schedule with the accounting records and for the franchisee to reproduce the calculation.

In particular, answer the following questions:

• Will sales be counted inclusive or exclusive of VAT?
• How will actual customer refunds and cancelled sales be deducted?
• How will discounts offered by the business affect the calculation?
• Can intermediary platform commissions be deducted from sales?
• Will the royalty arise when a gift card is sold or when it is redeemed?
• What rules will apply to credit sales, advance payments and bad debts?

Do not confuse the sales amount with the amount received in the bank account. For example, a payment made by an intermediary platform after deducting its commission is not the same as the value of the sale to the customer. The agreement must state clearly whether the royalty is calculated before or after commission.

For gift cards and advance payments, establish a rule that prevents the same transaction from being counted twice. If the business carries out a mix of activities, also specify how income outside the scope of the franchise will be separated out. Check with your accountant that your chosen approach is consistent with accounting and tax requirements.

3. Set out the reporting, calculation and adjustment process

Even with an accurate definition of turnover, an unclear period-end process can lead to disputes. The business’s sales report, calculation schedule, invoice and payment date should all form part of the same workflow.

For monthly reporting, describe the following sequence in the agreement or an accompanying schedule: the franchisee submits the period report; the calculation base is established from the specified sales categories; the applicable rate is used to calculate the fee; and invoicing and payment are completed. Specify who is responsible for each stage and the deadline for completing it.

It is also important to identify which version of the sales system report will be treated as authoritative. Where records change later, the difference between the original and amended submissions must be traceable. A data transfer error should not automatically be treated as under-reporting sales.

Establish a separate adjustment procedure for refunds made after the period has closed. Explain whether the previous period will be recalculated or an adjustment will be made in the following period. State where calculation disputes should be submitted, which supporting documents are required and how payment will be handled while the dispute is reviewed.

To test the process, prepare a few sample transactions, including a discounted sale, a refunded sale and a sale subject to a commission deduction. If both parties cannot arrive at the same result, the wording is not yet clear enough.

4. Apply the Turkish legal framework correctly

Türkiye has no dedicated law governing franchise agreements as a whole, no mandatory registration system specific to franchise agreements and no standard statutory pre-contractual disclosure regime. This does not mean that fees can be set without restriction.

The Turkish Code of Obligations No. 6098 provides the basic framework for matters such as contract formation, interpretation, performance and default. The Turkish Commercial Code No. 6102 is also relevant to commercial relationships between merchants. Including a fee provision in a standard-form agreement does not automatically make it valid in every circumstance.

Competition issues are governed by the Law on the Protection of Competition No. 4054. Where the relevant conditions are met, agreements may fall within the scope of the Block Exemption Communiqué on Vertical Agreements No. 2002/2. The former franchise communiqué, No. 1998/7, is no longer in force, and eligibility for block exemption should not be assumed solely on the basis of market share.

Review the tax treatment and invoicing of the fee with your accountant, and the contractual provision with your legal adviser. Clearly state whether the contractual fee includes or excludes taxes. In particular, do not assume that the same tax treatment will apply to cross-border payments.

5. Set limits on fee changes from the outset

A fee that is clear at the start can become difficult to understand as additional charges are introduced. If other compulsory fees apply alongside the royalty, show them separately. It should be clear which services are included in the royalty and which are charged separately.

If a fixed fee is to be adjusted, specify the objective benchmark to be used and how often adjustments will take place. If the royalty rate may change, clearly define the conditions for doing so; do not rely solely on wording such as “the fee determined by head office”. For temporary discounts, document the start and end dates and the conditions for reverting to the standard fee.

Practical takeaway: Before making your first franchise offer, prepare a fee schedule, a calculation formula and a worked example for a reporting period. Whether a prospective franchisee can calculate the same fee using the same data is the most useful test of how clear the arrangement is.