If you’re new to franchising, you’ve probably come across the term “royalty fee” and wondered:
“Wait… I’m buying the franchise, so why do I have to keep paying the franchisor?”
It’s a fair question.
Royalty fees are one of the most important ongoing costs to understand before you become a franchise owner. They can have a significant impact on your cash flow and profitability, so you shouldn’t look at the franchise price alone.
The good news is that royalty fees aren’t as complicated as they may seem.
Let’s break them down.
What Is a Franchise Royalty Fee?
A franchise royalty fee is an ongoing payment you make to the franchisor for the continued use of the franchise system, brand, intellectual property, and other support provided under the franchise agreement.
In many franchise systems, the royalty is calculated as a percentage of your gross sales and paid weekly or monthly.
For example, let’s say:
- Your franchise generates $500,000 in annual gross sales
- Your royalty rate is 6%
Your annual royalty payment would be:
$500,000 × 6% = $30,000
And here’s something that surprises a lot of first-time franchise buyers:
That 6% is generally calculated on sales, not your profit.
So if your business has a difficult month and your expenses eat up most of your profit, the royalty may still be due because it’s based on the sales generated under the agreement. The FTC specifically cautions prospective franchisees that royalties may be payable even when the franchisee is losing money.
That’s why understanding the royalty structure is so important.
Why Do Franchises Charge Royalties?
Think about what you’re getting in exchange for buying into a franchise system.
You’re not simply buying a logo.
You’re typically getting access to a business model, brand, operating procedures, training, systems, intellectual property, and ongoing support.
The royalty helps fund that continuing relationship.
The International Franchise Association notes that royalty fees commonly support the continued use of the franchise system, brand, and ongoing franchisor support.
And from the franchisor’s perspective, ongoing royalties are generally an important source of revenue for operating and supporting the franchise system.
That’s the basic tradeoff:
You get access to an established system and brand. In return, you share a portion of the revenue with the franchisor.
How Much Are Franchise Royalty Fees?
There’s no universal royalty rate.
That’s important.
Different franchise industries and business models can have very different structures.
The IFA reports that royalty fees for percentage-based systems averaged about 6.7% across a sample of 1,342 franchise systems, but the averages vary significantly by industry. For example, its data shows averages ranging from about 4.6% in restaurants to higher averages in some business and personnel services categories.
Other industry guidance commonly places royalty rates somewhere around 5%–9%, but individual franchise agreements can fall outside that range.
So don’t automatically assume:
“5% is good and 8% is bad.”
That’s too simplistic.
A higher royalty doesn’t necessarily make a franchise a bad investment.
And a low royalty doesn’t automatically make one a great investment.
You have to look at the entire business model.
Here’s the Part Entrepreneurs Really Need to Understand
Let’s compare two hypothetical franchises.
Franchise A
- $1,000,000 annual sales
- 5% royalty
- $50,000 annual royalty
Franchise B
- $500,000 annual sales
- 3% royalty
- $15,000 annual royalty
At first glance, Franchise B looks better because the royalty percentage is lower.
But that’s not enough information. You need to ask these questions:
- What are the operating expenses?
- How much labor is required?
- What are the gross margins?
- How much does it cost to acquire customers?
- What is the rent?
- How much working capital is needed?
- How much does the owner realistically take home?
The royalty percentage is just one line on the income statement.
You need to understand what happens to the rest of the money.
Royalty Fees vs. Advertising Fees
This is another area that can confuse new franchise buyers.
Royalty fees and advertising fees are usually separate.
For example, a franchise might charge:
- 6% royalty
- 2% advertising contribution
That means you’re potentially paying 8% of gross sales toward those two franchise-related fees.
The FTC’s franchise disclosure guidance specifically identifies royalties and advertising fees as ongoing costs that prospective franchisees should review.
So don’t just ask:
“What’s the royalty?”
Ask:
“What are all of the ongoing fees I’ll be responsible for?”
That’s a much better question.
Where Do You Find the Royalty Fee?
One of the most important documents you’ll receive when evaluating a franchise is the Franchise Disclosure Document (FDD).
The FTC explains that FDD Items 5–7 cover important financial information, including initial fees and ongoing costs such as royalties and advertising fees.
In particular, Item 6 — Other Fees can provide a detailed breakdown of ongoing fees.
The FTC’s sample Item 6, for example, shows a 4% royalty based on total gross sales and separately identifies a 2% advertising fee.
But don’t stop at reading the percentage.
Read the definitions.
What exactly counts as gross sales?
Are there minimum royalty payments?
Are there technology fees?
Training fees?
Renewal fees?
Transfer fees?
Audit fees?
Other required charges?
In 2024, the FTC specifically highlighted concerns about undisclosed franchise fees and stated that franchisors cannot lawfully impose fees that weren’t previously disclosed.
That’s one more reason to take the FDD seriously.
What About a Flat Royalty?
Not every franchise uses a percentage of sales.
Some franchise systems may use a flat or fixed royalty fee, while others use different fee structures.
That can change the economics considerably.
For example, imagine a franchise charges a fixed $2,500 monthly royalty.
If you generate $25,000 in monthly sales, that’s effectively 10%.
But if you generate $75,000 in monthly sales, it’s only about 3.3%.
So when evaluating the fee structure, don’t just ask “How much is the royalty?”
Ask:
“How does this royalty structure behave as my business grows?”
That’s the kind of question an entrepreneur should be asking.
Should a High Royalty Fee Scare You Away?
Not necessarily.
This is where I think franchise buyers sometimes get too focused on one number.
Let’s say Franchise A charges 8% and Franchise B charges 5%.
It’s tempting to immediately say, “I’m taking the 5%.”
But what if Franchise A has:
- A stronger brand
- Better franchisee support
- Higher average sales
- Better systems
- Stronger customer demand
- Lower operating costs
- Better franchisee satisfaction
The additional royalty could potentially be justified by the overall economics of the business.
You’re not trying to find the lowest royalty.
You’re trying to find the best overall business model for you.
The Question I Would Ask Instead
When I’m helping someone evaluate franchise opportunities, I don’t want them obsessing over whether a royalty is 5%, 6%, or 7%.
I want them asking:
“What am I getting for that fee?”
Then go talk to franchisees.
Ask them:
- Does the franchisor provide meaningful support?
- Is the training valuable?
- Does the technology work?
- Is the marketing helping?
- Does the franchisor listen to franchisees?
- Do you feel the fees are justified?
- Would you buy this franchise again?
Those answers can tell you a lot more than the royalty percentage by itself.
Don’t Forget: Revenue Is Not Profit
This may be the most important takeaway for someone new to franchising.
If a franchise does $1 million in sales, you don’t have $1 million.
You still have to pay for things like:
- Payroll
- Rent
- Inventory
- Insurance
- Utilities
- Marketing
- Technology
- Supplies
- Taxes
- Royalty fees
- Other operating expenses
What matters is what remains after the expenses required to operate the business.
That’s why I always tell entrepreneurs:
Don’t fall in love with the revenue number.
Look at the economics.
Before You Sign, Ask These 7 Questions
Before investing in a franchise, make sure you understand:
1. What is the royalty rate?
Know the exact percentage or fixed amount.
2. What is the royalty calculated on?
Gross sales? Net sales? Another definition?
3. When is it paid?
Weekly, monthly, or another schedule?
4. Are there minimum royalty payments?
Some systems may have minimums or other requirements.
5. What other ongoing fees are required?
Advertising, technology, software, training, processing, and other fees can add up.
6. What does the franchisor provide in exchange?
Understand the actual support and services.
7. What do current franchisees think?
This may be one of your most valuable sources of information.
The Bottom Line
Royalty fees aren’t automatically good or bad.
They’re simply part of the economics of the franchise model.
The mistake is looking at a royalty percentage in isolation.
A franchise with a 4% royalty isn’t necessarily better than one charging 7%.
And a franchise with a higher royalty isn’t necessarily a bad investment.
You have to look at the whole picture.
The investment.
The revenue potential.
The operating expenses.
The support.
The brand.
The business model.
And, most importantly, whether it fits you.
That’s what due diligence is about.
At GoFranchise, we believe entrepreneurs shouldn’t be pressured into choosing a franchise before they understand what they’re actually buying.
Take your time. Ask questions. Talk to franchisees. Review the FDD. Look at the numbers.
The goal isn’t to find the franchise with the lowest fees.
It’s to find a franchise where the economics make sense and the business fits the life you’re trying to build.