Buying a Franchise in the UAE: Checking the Royalty Calculation Basis

When comparing franchise opportunities in the UAE, the brand with the lowest royalty rate may automatically look like the cheapest option. But the actual cost depends on the amount to which that rate applies, when payment falls due and which exclusions are allowed. This guide helps you turn a broadly worded royalty clause into a clear calculation method that you can test before committing and check once trading begins.

1. Understand the legal framework before discussing the rate

The UAE has no standalone federal law dedicated to franchising, nor a general federal regime requiring a standardised disclosure document before every franchise sale. Do not assume, therefore, that the franchisor must provide a standard schedule setting out every detail of its royalties. Explicitly request the information and documents you need, and record the final agreement in writing.

Depending on its nature and the law applicable to it, the relationship is subject to the general rules governing civil transactions, including the requirement to perform contracts in good faith, and Federal Decree-Law No. 50 of 2022 issuing the Commercial Transactions Law. Trade mark and tax legislation also have a bearing on licensing and invoicing. Federal Law No. 3 of 2022 regulating commercial agencies may apply if the arrangement meets the requirements for a registered commercial agency and is registered under that law; a franchise agreement is not automatically a registered agency.

Ask a UAE lawyer to establish the legal status of your agreement, particularly if either party or the business activity is based in a zone with a separate legal regime. The fact that an official body has published a model contract does not mean its definition of sales suits your business, or that its financial terms are required by law.

2. Turn ‘gross sales’ into a definition you can verify

Start with the most important question: are royalties calculated on invoiced amounts, money received or revenue recognised for accounting purposes? These bases are not interchangeable. You might issue an invoice for a credit sale today but receive payment later, while a customer might pay a deposit before you provide the service.

Ask for a definition that specifies which transactions are included in the royalty base, which outlet they are attributed to and when they are counted. Then review the following points individually:

• Value added tax (VAT): Is VAT collected from customers excluded from the royalty base? And is the royalty itself invoiced with any VAT applicable to that transaction? Discuss these as two separate issues with your accountant.
• Returns and cancellations: When are refunds deducted, and what supporting evidence is accepted?
• Discounts: Is the calculation based on the original price or the amount the customer actually paid? Who bears the cost of a discount if the franchisor requires a network-wide promotion?
• Vouchers and gift cards: Are they counted when sold or when redeemed? How is double counting prevented?
• Tips and delivery charges: Are amounts collected on behalf of third parties included, and how are they separated from the business’s revenue?

Using the term ‘net sales’ without explanation is not enough. Include an example for each scenario in a calculation schedule, and specify which supporting record takes precedence if the point-of-sale report differs from the bank reconciliation. A worked example exposes ambiguity faster than an exchange of abstract definitions.

3. Test delivery orders, minimum royalties and payment timing

For orders placed through delivery platforms, distinguish between the value of the customer’s order and the net amount the platform transfers to you. The agreement may require royalties to be calculated before the platform’s commission is deducted, even though the full amount never reaches your account. Do not assume that commission is automatically deductible; make its treatment explicit in the agreement.

Work with your accountant to prepare a trial reconciliation for a hypothetical month. Start with sales by channel, then show taxes, returns, discounts and platform commissions, ending with the royalty base and the amount payable. Ask the franchisor to approve the calculation method in writing, rather than simply agreeing verbally to the result.

Also examine any minimum monthly royalty. Must you pay it even when sales are low? Does it replace the percentage-based royalty or sit on top of it? Does it start from the actual opening date or another date? Ask for explicit provisions covering temporary closure and operational disruption, rather than assuming an automatic exemption.

Test how the payment deadline affects cash flow. If royalties fall due before platforms settle their payments or corporate customers pay their invoices, you may have to fund a recurring timing gap. Compare brands on this burden, not just the advertised rate.

4. Secure your right to check calculations and correct errors

The franchisor needs reliable reports, and you need to understand how its payment demands are calculated. Agree on the regular reporting template, submission deadlines, the procedure for correcting errors and how discrepancies discovered after the month-end close will be handled, whether they favour you or the franchisor.

Review the audit rights: who conducts the audit, which records can be requested, how data confidentiality is protected and when you must bear the cost. Avoid a clause that makes you responsible for all audit costs regardless of the findings. Instead, discuss a clear threshold for passing on costs where an underpayment has been established.

Pay attention to references to the operations manual as well. If the agreement allows the franchisor to amend it unilaterally, ask for a clause stating that changes to the definition of the royalty base or the introduction of new fees require written agreement and cannot be made merely by updating the manual. Specify which documents take precedence if their terms conflict.

Practical takeaway: Before signing, obtain a detailed definition of sales, an approved sample monthly reconciliation and a written correction procedure. If you cannot clearly recalculate the royalty from your own records, the clause needs further negotiation before you buy the franchise.