Franchise Basics: What You Should Know About Franchise Royalties

April 30, 2020

, by

Joseph Sexton

Franchise Royalties

What is a Royalty Fee?

In addition to charging an upfront franchise fee, franchises also charge ongoing royalties. If you’re looking at investing in a franchise, it’s time to start getting comfortable with the idea of paying both.

A royalty fee is an ongoing fee that a franchisee pays to the franchisor. This fee is usually paid weekly, monthly, or quarterly, and is typically calculated as a percentage of gross sales.

Unlike a franchise fee, the royalty is meant to be a profit center for franchisors and is payment to use the franchisors brand and IP. It also covers the costs of ongoing training, support/coaching for your business, and innovation. 

Read: About The Average Costs And Purpose of Franchise Fees

Why pay a Royalty Fee?

While you may be paying anywhere from 3% to as much as 25% of your revenue to the franchisor, you also have the experts right there to help your business grow. You won’t need to personally direct and invest in research and development campaigns for new products, marketing approaches, or sales tactics. 

The franchisor uses its own funds to test any innovations in your business, then rolls out a market tested system to the franchisees. At least that’s what they should be doing. Some franchises are certainly better than others when it comes to keeping their brand and business model current, and you can uncover this in your research of a franchise prior to investing. 

What is a Typical Royalty?

If you’ve looked into franchising, you may have noticed some royalties are 3%, while others are higher. Why is that? Well, there can be a number of justifications for a royalty based on the quality of ongoing support that they offer you, but I’ve found a correlation between the type of business and the royalty rate. 

Service Businesses 

Service businesses that do not sell actual products or require their franchisees to carry significant amounts of inventory typically have higher royalty rates. Why? The margins are typically better in these businesses so there’s more room for both you and the franchisor to put food on the table. 


Franchises in the food and beverage space typically have a lower royalty rate because the margins are thin, but also because the franchisor is typically making money from the supply chain. For example, they buy potatoes at $.10 per pound and sell them to you for $.20 per pound. They’re making more money from potatoes than from your royalty so they’re willing to offer a lower rate. 


It’s important to keep in mind that you actually want your franchisor to make money. You need them growing brand awareness, innovating, and reinvesting in the growth of the brand. They need your royalty payment to do that. Always remember that the incentives are designed to be well aligned in franchising i.e. the franchisor is only successful from a healthy royalty stream, and a healthy royalty stream is only developed if they have successful franchisees. Especially since franchisors really want multi-unit franchisees and you will most likely not open additional units if the business doesn't make economic sense to do so.

There’s typically no negotiation on the royalty fee and there’s really no such thing as a “fair” royalty. After all, would you rather pay 10% with a great return on your investment or 5% to a weaker concept just because you get to keep more of your revenue? In other words, the royalty should be evaluated in the context of your overall return on investment. If you’re excited about the ROI, you’ll probably just have to bite the bullet on the royalty, whatever it may be. 

<< Back to Franchise News

Other Articles

Top Pet Franchise 2023

PetWellClinic Breaks into Michigan with 10-Unit Agreement

November 8, 2022
Read Article
Fast Growing Pet Franchise Denver 2022

Fast Growing Dog Daycare Franchise Secures First Location in Denver

September 20, 2022
Read Article
Veterinary Franchise

PetWellClinic Franchise Signs 3 Unit Deal To Provide Pet Care in NorthEast Massachusetts

June 21, 2022
Read Article
Dog daycare franchise

Dogdrop Franchise Inks 5 Unit Deal in Denver Colorado

June 9, 2022
Read Article
Pet-Care Franchise

Fast Growing Pet-Care Franchise Expands To Salt Lake City

March 29, 2022
Read Article
emerging petcare franchise

PetWellClinic Expands To Philadelphia Area with Goldfish Swimschool Franchisees

February 11, 2022
Read Article
Fast growing pet care franchise

Fast Growing PetCare Franchise PetWellClinic Surpasses 100 Units In Development

January 11, 2022
Read Article
fast growing petcare franchise

Walk-In Veterinary Franchise PetWellClinic Expands to New Orleans

December 8, 2021
Read Article
Pet Care Franchise Expands To Phoenix

Fast Growing Petcare Franchise PetWellClinic Heads To Phoenix

November 29, 2021
Read Article
PetCare Franchise

Modern Veterinary Franchise Expands to Southern Orange County

November 10, 2021
Read Article
start a franchise right now

The History of The Word Franchising (And How It Impacts Your Career Path)

November 1, 2021
Read Article
start a franchise right now

Openness and Optimism: Finding the Right Franchise

October 25, 2021
Read Article