Jania Bailey, CEO of FranNet, urges you to dig deeper into the financials and gain a clear understanding of the situation if a franchise system relies on selling more franchises just to meet payroll expenses.
Updated April 2025
When exploring franchise opportunities, it’s important to understand how the business generates revenue and supports its network. A “royalty self-sufficient franchise” is a key concept to consider as it offers valuable insight into how franchisors and franchisees are aligned for mutual success. Let’s explore what it means and why it matters to both franchisors and franchisees.
What is a Royalty in Franchising?
The initial franchise fee is a one-time payment that grants the right to use the franchisor’s brand and business model.
Royalty fees, on the other hand, are ongoing and typically cover continued support, marketing, training, brand development, and more. In short, they go toward the maintenance of the franchise as a whole. While there are various ways to calculate royalty fees, they are most commonly based on a percentage of gross sales.
Defining a Royalty Self-Sufficient Franchise
When a franchise becomes “royalty self-sufficient”, it means that their operations and growth are primarily funded by royalty income, not by upfront franchise fees. It often signals maturity in a franchise system, showing that the brand has reached a point where ongoing operations can be sustained by the performance of existing locations.
5 Advantages of a Royalty Self-Sufficient Franchise
#1 – Proven, Profitable System
This type of franchise proves a solid business model with a system that works well in practice. A brand has reached a new level of operational success when it doesn’t rely on frequent new sales to stay afloat.
#2 – Sustainable Revenue Stream
A royalty self-sufficient franchise means that the franchise isn’t relying on one-time initial franchise fees. Rather, there is a steady revenue stream from ongoing royalties, creating long-term financial stability.
#3 – Aligned Interests
Since royalties are based on franchisee performance, franchisors are incentivized to help individual locations thrive, strengthening the brand overall. This drives them to offer robust support, training, resources, and more.
#4 – Reduced Pressure to “Upsell”
Franchisors that are royalty self-sufficient don’t rely heavily on selling new locations for revenue, so their focus tends to be on improving operations, not just expanding. This is a win-win for the individual franchisees and the network as a whole.
#5 – Stronger Brand Reputation
With a network of healthy, profitable franchisees, the brand is better positioned to grow organically and attract high-quality candidates. This strong foundation makes it a more appealing choice for potential franchisees and customers alike.
Is a Royalty Self-Sufficient Franchise a Must-Have for Franchisees?
The answer to this question ultimately depends on your priorities as an investor. Without a doubt, a royalty self-sufficient franchise offers stability and reliable support from the franchisor. However, it’s possible you’ll want to choose a franchise with strong growth potential or an innovative business model even if it hasn’t yet become royalty self-sufficient. If the franchise offers a solid support system, strong brand recognition, and a roadmap to profitability, it can still be a lucrative opportunity.
Interested in Franchise Ownership?
Ready to explore franchise ownership but unsure where to start? FranNet is here to guide you. Our expert franchise consultants take the time to understand your goals, strengths, and lifestyle to match you with opportunities that truly fit. From your first question to signing the agreement, we’re with you every step of the way. Schedule your free consultation today to get started!