What Do Franchise Royalties Cover?

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Franchising is a fee-based business for franchisors. There are several one-time start-up fees to open a franchise, but the royalty fee is the regular income that franchisors collect.

Royalties are the funds the franchisee pays to use something that someone else created (in this case, the franchise business idea and brand). Franchisees create sales, and a portion of that is paid to the franchisor as a royalty fee in exchange for permission to use its proprietary trademarks and processes.

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Royalty Fees Vary

Fees vary by franchisor, but they are typically due every month. The amount that a franchisee pays is usually between 4% and 8% of the franchisee’s gross sales each month. But some franchisors calculate it based on net sales (after expenses). That’s good because you don’t have to pay royalties on expenses, but the paid percentage rate is also higher. Then, to make it consistent, franchisors usually will use an ACH draft to automatically pull their amount due each month from the franchisee’s account.

What Do You Get for a Royalty Fee?

Royalty fees are the franchisor’s income. Since royalty fees are recurring, they serve as maintenance fees for the franchisor. What do they maintain? For starters, it pays the franchisor’s overhead, but the franchisor reinvests most of the funds to promote the organization. That includes salespeople who continue to market the franchise to new franchisees. It could include expanded product and service lines that are negotiated on behalf of all franchisees and help you expand your business offerings.

Also, technology and point-of-sale processes are continually updated and require support from each franchise. In all cases, the royalty fees support the infrastructure needed to support a larger brand and reputation than your franchise (but that makes you look like a more reputable, bigger fish in the business world).

In some cases, royalty fees include marketing and advertising efforts. So, the franchisor will coordinate a promotion to introduce a new product, for example, but the benefits of increased sales go to you, the franchisee. To complete the cycle, a portion of those sales goes back to the franchisor each month as your royalty fee.

Is It Worth It?

Having that royalty feed skimmed from your hard earnings can be tough to accept as part of a franchise purchase. But choosing a franchise (and paying fees) has significant value for you as an entrepreneur:

• Fewer Mistakes. With a winning process already designed, you will make fewer mistakes than if you go it alone. The franchisor has already worked through most of the bugs that trip up independent business start-ups.
• Support Network. When you have a question, there are many people to assist. From corporate to other franchisees, you will have a network of knowledgeable, experienced people—all of whom want you to succeed.
• Purchasing Power. As part of a larger organization, many of your products and services will be less than they would be on your own. Those savings directly increase revenue.
• Exit Assistance. You aren’t starting a business to leave it, but long-term planning is important, and you won’t run your business forever. As a franchisee, it will be easier to sell—partly because you own a known brand and partly because the franchisor will assist in the transition.
• Increased Value. Every franchisee’s success contributes to your own. As a brand increases in value, so does your piece of the pie. And with that comes greater success.

Royalty fees may feel like an extra burden for your new franchise business, but the franchisor's support creates a mutually beneficial financial relationship. The collaborative goal of high profit and business comes through the royalty fees that support your franchise.

Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.