Franchise royalties in Venezuela: how to calculate and agree them

Turning an existing business into a franchise involves more than deciding how much to charge each month. You need to establish what the fee covers, which revenue it is calculated on and how the figures will be checked. A clearly defined royalty helps the franchisor meet its commitments and prevents disputes across the franchise network. This guide explains how to put one in place before offering your model to third parties.

1. Define what the ongoing royalty covers

A royalty is an agreed recurring payment for the rights and services the franchisee receives. It may cover continued use of the brand, access to the business system and support throughout the contractual relationship. Its scope should match the obligations the franchisor actually undertakes.

Do not confuse it with the initial franchise fee or advertising contributions. If there are separate charges for software, additional visits or extra training, identify them explicitly. Charging twice for a poorly defined service undermines trust.

Before setting the amount, draw up a list of the recurring costs you will incur in supporting each unit. Distinguish shared costs from those that increase with each new opening. Then assess the proposed charge against the financial capacity of a unit run by a third party: your central operation must be sustainable without wiping out the franchisee’s margin.

2. Choose a formula and define its calculation basis

Options include a fixed amount, a percentage of sales or a combination of the two. Each distributes risk differently. A fixed amount makes royalty income easier to forecast, but places a greater burden on the franchisee when sales fall. A percentage moves in line with turnover, but requires reliable records. Combining a minimum payment with a percentage requires particular care during the start-up phase.

Do not simply agree a percentage of ‘net sales’ without defining the term. The contract or a financial schedule should clarify:

• Whether the calculation excludes value added tax (VAT) and other amounts collected on behalf of third parties.
• How returns, cancellations and discounts actually granted are deducted.
• Whether credit sales are counted when invoiced or when payment is received.
• How advance payments, gift cards and orders awaiting delivery are treated.
• Which unit is credited with online sales and orders fulfilled by several outlets.
• Whether commissions charged by delivery platforms or payment providers reduce the calculation basis.

The distinction between a sale and a bank deposit matters. If a platform transfers the proceeds after deducting its commission, that deposit does not necessarily represent the contractual calculation basis. Set out the rule in writing to avoid ad hoc deductions.

3. Align the agreement with Venezuela’s legal framework

Venezuela does not have a comprehensive law specifically governing franchises. A franchise agreement is an atypical commercial contract, meaning it is not a separately defined statutory contract type. Its obligations fall primarily within the Commercial Code (Código de Comercio) and the Civil Code (Código Civil), while remaining subject to applicable mandatory rules.

The Industrial Property Law (Ley de Propiedad Industrial) is relevant to the trade mark rights covered by the agreement. You must also consider the tax rules applicable to the transactions and payments. The freedom to agree royalties does not remove any invoicing, tax reporting or withholding obligations that may apply.

Have a lawyer and an accountant review the financial clause, particularly where payments abroad or amounts denominated in foreign currency are involved. Define the reference currency, payment currency, conversion mechanism and applicable conversion date in accordance with current regulations. Also clarify whether amounts include taxes and how any tax withheld will be documented. Do not automatically import another country’s tax rules into the contract.

4. Design a monthly closing process that can be checked

Set out a straightforward procedure covering the cut-off date, report submission, review, issue of the billing document and payment deadline. Identify who is responsible for each step and how discrepancies should be reported.

The report should make it possible to reproduce the calculation using sales figures, authorised adjustments and the resulting calculation basis. Request only the information needed, and set rules for access to records, confidentiality and the applicable retention period.

Include a mechanism for correcting errors after the monthly close. A subsequent return, for example, should have a defined treatment rather than depend on monthly negotiation. Any late-payment interest or other consequences of delay require clear wording and legal review.

5. Test the calculation before signing

Apply the proposed formula to actual records from the existing business. Model a period of low sales, another with returns and another with a higher proportion of platform sales. Check both the franchisor’s income and the impact on the unit.

Then ask two people to calculate the royalty independently using the same instructions. If they reach different results, ambiguities remain.

Practical takeaway: prepare a summary sheet covering the formula, calculation basis, exclusions, taxes, currency, timetable and correction procedure. Incorporate it consistently into the contract before presenting the offer to prospective franchisees.