Auditing Franchise Sales in the UAE Before Expanding

You may agree a fee percentage with your franchisee, only to disagree over the first monthly statement: are sales calculated before or after delivery commission? When are refunds deducted? When turning an existing UAE business into a franchise, you need a clear system for documenting and reconciling sales, not just a percentage written into a contract. This system protects trust across the franchise network and makes fees verifiable without the founder’s daily involvement.

Start by defining sales, not setting the percentage

Published franchise templates and practices in the UAE highlight the importance of defining the calculation basis. The Ministry of Economy and Tourism’s ‘Common Contracts’ initiative includes a restaurant franchise agreement template referring to a recurring payment linked to turnover, while Emarat’s FAQs describe ongoing support fees linked to net sales. These formulations do not provide a standard definition that automatically suits every business; you still need to clarify what counts as sales and what is excluded.

Prepare a contractual schedule entitled ‘Definition of Sales for Fee Calculation Purposes’. Distinguish between recorded sales, amounts collected and the net amount reaching the bank account. A delivery platform may transfer funds after deducting its commission, but that does not necessarily make the transferred amount the basis for franchise fees.

At a minimum, settle how the following will be treated:

• VAT, expressly stating whether it is excluded or how it is otherwise handled.
• Discounts: who funds them, and how do they affect the calculation basis?
• Cancellations and refunds, and the documents required to substantiate each case.
• Delivery and electronic payment commissions: are they expenses or permitted deductions?
• Gift cards and prepaid vouchers, including when they are counted to avoid double counting.
• Orders handled across branches, and sales for which payment is deferred or remains uncollected.

Test the definition against actual transactions from your existing business. If the accountant and operations manager arrive at different figures for the same transaction, the wording needs revising before you sign an agreement.

Build a single audit trail from invoice to reconciliation

Requiring the franchisee to submit a monthly total is not enough. You need a traceable route from each sale to the report and then to the fee due. Specify the approved point-of-sale system, how orders from apps are recorded, and who has authority to cancel or amend transactions.

Create a standard reporting template showing total sales, exclusions broken down by type, the final calculation basis and the resulting fee. Require supporting sales-channel reports and delivery-platform reconciliations, rather than relying solely on a copy of the bank statement. A bank transfer may combine transactions from different periods or include deductions that the agreement does not permit.

Set deadlines for closing the reporting period, submitting the report and making payment, along with a procedure for correcting errors discovered later. Do not allow staff to overwrite figures for a closed period without a clear audit trail. Instead, use an adjusting entry that records the reason, approval and supporting documentation.

For example, if an order is refunded in a later month than the original sale, the system should specify the period in which the refund is deducted and how it is linked to the original invoice. Otherwise, it could be deducted twice or rejected despite being valid, creating a dispute unrelated to the agreed percentage.

Draft balanced audit rights

The agreement should give the franchisor a workable right to verify sales, not unrestricted access to all the other party’s business affairs. Define the sales-related records covered, how they can be accessed, the advance notice required for an audit, who may conduct it and their confidentiality obligations.

Use a staged approach: a desk review of the report, followed by requests for specific clarification, then a broader examination if unexplained discrepancies remain. The agreement may provide for different arrangements where there are serious grounds to suspect manipulation, but these should be legally reviewed and must not be used to disrupt operations.

Also settle who pays for the audit, when the cost shifts to the franchisee, and how underpayments or overpayments are resolved. Do not leave ‘material discrepancy’ without an agreed threshold, or make every administrative error an automatic trigger for a severe penalty.

To maintain balance, give the franchisee a defined period in which to submit supporting documents and challenge the findings. Limit access to the data needed for verification: reviewing revenue does not automatically require copying customer data or inspecting separate business activities.

Embed the system in the contract and test it before granting a franchise

The UAE has no standalone federal law governing franchising alone, nor a general federal pre-contractual disclosure regime specifically for franchises. This makes the drafting of sales definitions and verification rights particularly important in practice, within the general rules on contracts under the Civil Transactions Law, Federal Decree-Law No. 50 of 2022 on Commercial Transactions and other applicable legislation.

If the arrangement meets the conditions for a registered commercial agency, Federal Law No. 3 of 2022 Regulating Commercial Agencies also becomes relevant to the legal assessment. Do not assume that calling a document a ‘franchise agreement’ determines its legal status. Engage a lawyer to identify the applicable regime, particularly given the different legal frameworks in some free zones.

Put the core financial rules in the agreement or a signed schedule, and leave the steps for generating reports to the operations manual. Do not allow the contractual definition of sales to be changed simply by updating operational instructions.

Practical takeaway: Before granting a franchise, run a complete trial reconciliation using your existing business records. If every exclusion, adjustment and amount due can be traced without a verbal explanation from you, you have built a clearer foundation for collecting fees and maintaining trust.