Franchising in Venezuela: how to calculate and agree royalties

A seemingly straightforward royalty can become a hard-to-predict cost if the agreement does not explain how it is calculated. Before buying a franchise in Venezuela, look beyond the percentage: identify the calculation basis, exclusions, currency and payment procedure. Across a franchise network, a verifiable formula helps prevent disagreements between the brand and its franchisees.

1. Identify every type of royalty

Ask for a written breakdown of the recurring fees for using the brand and business model. Royalties may be fixed, sales-based or a combination of both. They may also include a minimum payment, even if the outlet’s turnover is low.

Do not confuse a minimum royalty payment with an obligation to meet minimum sales targets: the former determines how much you pay; the latter may have different contractual consequences.

For each charge, record the following details:

• Amount or formula: a fixed sum, a percentage or a combination.
• Start of charging: signing, opening or another defined event.
• Frequency: the period covered and the payment due date.
• Adjustments: the conditions and procedure for changing the amount.
• Overlap with other fees: whether it replaces another fee or is charged in addition to it.

Separate royalties from advertising contributions, technology licence fees and additional services. Even if they appear on the same invoice, you need to identify each obligation and avoid duplicate charges. If the proposal refers to an ‘all-inclusive’ fee, insist on a list of what is included and what is charged separately.

2. Define which sales count towards the calculation

The term ‘gross sales’ does not, on its own, explain how a royalty will be calculated. Ask for a contractual definition that allows the outlet’s accountant and the franchisor to reach the same result using the same records.

At a minimum, clarify how the following are treated:

• Taxes included in the invoiced amount.
• Discounts, returns and cancelled transactions.
• Credit sales for which payment has not yet been received.
• Deposits and payments for products to be delivered later.
• Commissions deducted by platforms or intermediaries.
• Sales made through digital channels and fulfilled by the outlet.

Do not assume that an expense reduces the royalty calculation basis. A platform’s commission may reduce the money you receive without reducing the sales figure used to calculate royalties, if that is what the agreement provides. Similarly, invoicing and receiving payment do not necessarily happen at the same time.

Ask for a sample royalty calculation based on transactions representative of the business. It should show the starting amount, each adjustment and the final calculation basis. You do not need to accept hypothetical sales figures as evidence of profitability: the aim is to check that the formula works.

Also agree how to account for a return made after the end of the reporting period. Specify whether it will be reflected in an adjustment to the next royalty statement and what supporting documents you must provide. Without this mechanism, you could pay royalties on a sale that was ultimately reversed.

3. Agree the currency, royalty statements and error-review procedure

If sales and royalties are expressed in different currencies, the agreement must identify the reference currency, the payment currency and the conversion rule. Avoid vague references such as ‘at the exchange rate on the day’ without specifying the source, date and transaction to which the rate applies.

Ask your advisers to review the validity and tax treatment of this arrangement under current legislation. Also clarify the supporting documents required, any applicable withholding taxes and transfer charges, without confusing these items with the royalty itself.

Negotiate a royalty statement that you can review before payment falls due. It should set out the period covered, the sales included, any adjustments, the royalty rate applied and the balance payable.

Propose a written procedure for reporting discrepancies, submitting records and receiving a response. Specify how the undisputed portion will be handled and when any overcharge will be refunded or credited. Raising an objection does not automatically suspend the payment obligation: its effects must be clearly defined and reviewed by a legal adviser.

4. Turn the formula into a clear contractual obligation

Venezuela does not have a comprehensive franchise-specific law or a special general framework for standardised pre-contractual disclosure. This does not mean that franchising is unregulated: the Civil Code governs obligations and contracts, while the Commercial Code provides the relevant commercial rules. Tax provisions and other rules applicable to the business must also be observed.

The Code of Ethics for Franchising in Venezuela, associated with Profranquicias, is a self-regulatory instrument, not national legislation. Check whether it applies through membership or incorporation into the agreement; do not mistake it for an automatic legal guarantee concerning charges.

Include the formula and its worked examples in a schedule consistent with the agreement. Explicitly negotiate your access to detailed royalty statements and the correction procedure. Do not leave essential terms dependent on a verbal explanation.

Practical conclusion: before signing, work through a complete royalty calculation with your accountant. If you cannot establish how much is payable and how to correct an error, the clause still needs work.