Franchise royalties are a cornerstone of the franchising business model, shaping the relationship between franchisors and franchisees. Whether you’re considering buying a franchise or simply want to understand how these fees work, it’s essential to grasp what franchise royalties are, how they’re calculated, and why they matter.

What Are Franchise Royalties?

Franchise royalties are ongoing payments made by the franchisee to the franchisor for the right to operate under the franchisor’s established brand, business systems, and intellectual property. Unlike the initial franchise fee—which is a one-time payment for joining the franchise system—royalties are recurring and typically last for the duration of the franchise agreement.

How Are Franchise Royalties Calculated?

The most common method for calculating franchise royalties is as a percentage of the franchisee’s gross sales, usually paid monthly or weekly. The typical royalty rate ranges from 4% to 12%, depending on the industry, the franchise’s brand strength, and the level of support provided1. For example:

• Retail franchises often charge 5–6%
• Service franchises may charge 8–10%
• Some agreements may set a flat fee or use a variable percentage based on sales volume

What Do Franchise Royalties Cover?

Royalties are not just a cost—they fund the ongoing support and resources that franchisors provide to their network. These include:

• Brand Strength and Marketing: Royalties help maintain and grow the brand, fund national marketing campaigns, and ensure consistent customer experiences across locations.
• Training and Support: Franchisees receive operational guidance, training programs, and troubleshooting assistance, all funded by royalty payments.
• Research and Development: Continuous innovation in products, services, and technology is supported by royalties, keeping the franchise competitive.
• Administrative and Operational Management: Royalties cover the franchisor’s infrastructure, staff, and systems that benefit the entire network.

Franchise Royalties vs. Other Fees

It’s important to distinguish royalties from other franchise-related fees:

Initial Franchise Fee

Right to join the franchise, initial setup

One-timeRoyalty Fee

Ongoing use of brand, support, systems

Ongoing (monthly/weekly)Marketing/Ad Fee

National/regional marketing campaigns

OngoingTechnology/Other Fees

Software, equipment, or additional servicesOngoing/as needed

Pros and Cons of Franchise Royalties

For FranchisorsFor Franchisees+ Steady revenue stream+ Access to proven brand and systems+ Funds for support and innovation+ Ongoing training and marketing+ Maintains brand standards+ Operational guidance and support- Dependent on franchisee performance- Ongoing financial obligation- Potential for disputes over value- May impact profitability

Challenges in Royalty Collection

Collecting royalties can be complex due to inconsistent revenue reporting, human error, and varying agreement terms. Many franchisors now use automated systems to streamline collections, reduce errors, and ensure transparency for both parties.

Are Franchise Royalties Worth It?

For most franchisees, the benefits of being part of an established system—brand recognition, proven business models, and ongoing support—outweigh the cost of royalties. However, it’s crucial to understand the full fee structure and ensure the royalty rate is sustainable for your business.

Key Takeaways

• Franchise royalties are ongoing payments for the right to operate under a franchisor’s brand and receive support.
• They are usually calculated as a percentage of gross sales, with typical rates between 4% and 12%.
• Royalties fund brand development, training, support, and innovation, benefiting both franchisor and franchisee.
• Understanding the structure and purpose of royalties is essential before entering any franchise agreement.

By understanding franchise royalties, you can make informed decisions and set realistic expectations for your franchising journey.