When you buy a franchise, you’re not just investing in a business, you’re joining a system. Part of that system includes paying royalty fees. These fees help support the ongoing services and brand strength you benefit from.
What are royalty fees?
Royalty fees are ongoing payments you make to the franchisor. They’re usually a percentage of your gross sales. Some franchises charge a flat fee instead, but most use a percentage model. This fee gives you access to the brand, systems, support, and more.
These fees help fund the franchisor’s operations. That includes national advertising, research and development, training programs, and technology. In return, you get tools and resources to help your location run smoothly.
How are royalty fees calculated?
Most franchisors base the royalty fee on gross revenue, not profit. For example, if your franchise earns $20,000 in one month and the royalty fee is 6%, you would pay $1,200. You pay this amount even if you have high expenses that month.
Some franchisors also include a minimum monthly fee. That means you pay a set amount, even if your sales are low. Others might cap the fee after you reach a certain amount. Make sure you understand how your agreement handles this.
Why do franchisors charge these fees?
Franchisors use royalty fees to keep the system strong. They fund marketing campaigns, support teams, and updates to business operations. These things help protect the value of the brand you’re using. In a successful franchise system, everyone benefits from the success of others.
Franchisors also use the fees to monitor and support franchisees. If a location struggles, the franchisor might step in with guidance. Without royalties, this level of support wouldn’t be possible.
What should you watch for?
Before you sign a franchise agreement, read the fee terms carefully. Look for details like how often payments are due, what sales are included, and whether there’s a minimum. You don’t want surprise costs hurting your business.
State and federal laws often require franchisors to disclose this information clearly. Make sure everything is spelled out in the Franchise Disclosure Document (FDD).
Royalty fees are more than just another bill. Knowing how they work lets you plan better and protect your investment. By reviewing your agreement closely, you can avoid surprises and keep your business running smoothly.