What Are Franchise Royalty Fees?

Franchise royalty fees are one of the biggest costs you’ll have to consider when purchasing a franchise, and you should pay close attention to them before you sign your franchise agreement. But what exactly are franchise royalty fees? And how much should they be? Here are some answers to common questions about franchise royalty fees.

What is a franchise royalty fee?

A franchise royalty fee is a charge paid by a franchisee (the person who buys into a franchise system) to his or her franchisor (the person who owns and licenses that system). This money is generally used to offset costs associated with maintaining and managing a branded company. Typical fees vary depending on things like your initial capital investment, location of your business, etc. Of course, there are also other fees involved in buying a franchise: real estate costs for store-front locations, construction, and development fees. But when you’re talking about selling franchises in general— rather than specific companies—franchise royalty fees are generally going to be higher than one-time costs like startup expenses.

What different types of franchise royalty fees are there?

A range of royalty fees are associated with franchising. If you’re buying a franchise, you’ll usually be charged an initial fee and a continuing fee in order to use the trademark. The initial fee is due when you purchase a franchise while continuing fees are collected on an ongoing basis from your sales revenue. These fees will typically be 5-10% of revenue and they’ll vary according to your sector, but can get as high as 20%. Some companies may also charge continuing fees for a new store or marketing development, or local training. Below we will list the 3 most common types of franchise fees associated with buying a franchise business.

1) Fixed percentage franchise royalty fees

When purchasing a franchise, you’ll pay a fixed percentage of your sales to your franchisor. For example, if you buy into a franchise that charges 4% in fees for royalty, you’ll have to pay 4 percent of all revenue brought in from operations. This revenue can be from several sources: Products, services, and memberships that are sold in conjunction with your main product line or service. A flat royalty fee or some variation on a percentage royalty fee is often best if you are getting started in business because it keeps costs low while allowing you to keep cash flow positive. Because these fees tend to be higher than other types of fees, however, they may not be right for everyone.

2) Increasing percentage franchise royalty fees

A franchisor has the right to increase your franchise fee depending on certain factors. For example, is your franchise based in a popular location? Or did you pay more when buying a franchise, would it be fair for them to charge you less money every year because of what they paid you originally? If a franchisor raises their percentage royalty fee then that should apply equally to all franchisees across their entire network and not just those with older agreements but sometimes it can just be a case of individual locations where the franchise business is located.

3) Decreasing percentage franchise royalty fees

The franchisor may decrease the royalty fee percentage as an incentive to ambitious franchisees. This is more of a bonus than a discount, as it will increase the franchisee’s potential profits and decrease his or her start-up costs, allowing him or her to pay less upfront. A lower royalty fee may only last for a certain number of years; if the franchisee is able to maintain strong sales after that period of time, he or she may be granted another term at the lower royalty percentage rate. If sales continue to soar even after that period of time, the franchisor might permanently reduce the franchise fee percentage.

Interested in finding out more information about buying a franchise?

It’s a little-known fact that buying a franchise can be much less expensive than starting your own business from scratch. That said, if you want to buy into a franchise, there are some additional costs you should know about. If you are seriously considering buying a franchise we highly recommend you do thorough research before investing in any franchise business available.