Updated November 2024
Franchising offers notable advantages over starting a business from scratch, including an established customer base and a trusted brand with proven operating procedures.
Franchising also comes with unique fees for the privilege of using a brand’s name and receiving continuous support. These include the initial franchise fee and ongoing royalty fees.
What Are Franchise Royalty Fees?
The initial franchise fee is a one-time fee that covers the basics of getting a franchise up and running. This includes site selection, build-out, and the initial training and marketing.
Royalty fees are continuous expenses that go toward the maintenance of the franchise as a whole. Depending on the franchise, these fees are either a flat rate or a percentage of revenue.
There might also be additional fees related to advertising, specialized training, technology maintenance, and more.
What Do Royalty Fees Cover?
Royalty fees are key to a franchise’s success as they fund the resources and support systems provided by the franchisor. Not only does this keep the wheels turning, but it also ensures brand consistency and quality across all franchise locations.
More specifically, royalty fees cover:
- Field consultants
- Marketing campaigns
- Business strategies
- Franchise-wide support initiatives
- Access to proprietary tools and technology
- Administrative costs of running the franchise
- Expansion efforts to recruit new franchisees
While franchises certainly profit from royalty fees, they also fund valuable resources and support efforts that directly benefit all franchisees in the network.
How Do Franchisors Determine Royalty Fees?
There isn’t a set formula for how a franchisor must determine royalty fees. Ideally, the fee will permit both the franchisee and franchisor to make a healthy profit while keeping the entire franchise network running smoothly. While there is more than one way to determine a royalty fee, franchisors should consider the economics of individual franchise locations. This includes:
- Labor costs
- Rent
- Inventory
- Supply costs
- And more
The most common method for calculating royalty fees is by using a percentage of the gross sales of the franchisees. This can be fixed or variable depending on gross sales, but it often falls in the range of 5-9%. Various other royalty collection methods include:
- Monthly Minimum Royalty Fees – Some franchisors set a minimum royalty fee that franchisees must pay regardless of sales.
- Incremental or Tiered Percentage Fees – If your sales are within a certain range, you pay one set amount and if your sales are in a higher range, you pay a higher set amount.
- Product-Based Royalty Fees – For franchises that sell products (e.g., food, retail), franchisors may charge royalties on specific product sales rather than overall revenue.
- Royalty Fees on Net Profit – A less common approach, some franchisors charge royalties based on net profit rather than gross sales.
- Royalties Based on Units Sold: Particularly popular with product-driven franchises, this model charges royalties based on units sold rather than sales revenue.
- Annual or Quarterly Adjustments Based on Performance – In some cases, franchisors assess franchisee performance quarterly or annually and adjust royalty rates based on specific performance metrics.
Are There Other Ways Franchisors Collect a Royalty Fee?
While there are some franchises that don’t technically have a royalty fee, they likely collect the “fee” in a different way. For example, some franchises will require franchisees to purchase products from the parent company or designated suppliers, usually at a marked-up price, which takes the place of a direct fee.
What’s the Difference Between Royalty Structures in the US vs. Canada?
Franchise models in the United States and Canada share similar royalty structures. Any adjustments in the fees will be a result of the country’s market dynamics, regulatory frameworks, and economic conditions. More specifically, these potential distinctions include:
- Market Size and Population Density – The U.S. has a more densely populated market than Canada, allowing for higher revenue potential in many regions. This might lead to lower royalty fees for franchise locations in Canada in order to attract franchisees in less populated regions.
- Royalty Percentage Variances – In both countries, royalty fees are commonly structured as a percentage of gross sales. However, consumer spending patterns and operating costs are different in each country. Therefore, a U.S franchise might charge a 5-8% royalty, while the same brand in Canada might charge 4-6%, reflecting both economic adjustments and cost considerations.
- Government Regulations and Disclosure Requirements – The U.S. has strict franchise regulations that include requiring franchisors to provide a Franchise Disclosure Document (FDD) outlining fees such as royalties in clear terms. While Canada doesn’t have a federal franchise law, several provinces do have franchise-specific regulations (e.g., Ontario, Alberta, British Columbia, Manitoba, Prince Edward Island, and New Brunswick). However, the exact requirements will vary, potentially influencing how royalty fees are structured and presented in each province.
Interested in Franchise Ownership?
Franchising offers incredible advantages to aspiring entrepreneurs, but it’s important to understand the various costs and fees that come with buying a franchise. FranNet is here to help. Our expert franchise consultants will not only match you with the right franchise opportunity, they will walk you through the process from start to finish. Schedule your free consultation today to get started!