If you’re just starting to research franchises and which opportunity may be right for you, you’ll notice that there are a number of different costs and fees involved beyond the initial investment.
While the exact costs can vary dramatically depending on the franchise you choose, you can usually expect to pay a royalty fee during the course of your partnership with a franchisor.
We break down what this means to provide a better understanding of what your money is being used for.
What is a Franchise Royalty Fee?
A royalty fee in the recurring payment franchisees will make to their franchisor.
Royalty fees are usually calculated as a percentage of gross sales. How much you’re expected to pay (usually weekly or monthly) will be clearly laid out in your franchise agreement.
Why Do Franchisees Pay a Royalty Fee?
This fee essentially functions as payment for the resources provided by the franchisor and the continued ability to operate under their name and brand identity.
The royalty fees paid by franchisees may help cover the franchisor’s administrative costs, business development, ongoing franchisee support/training and more.
Royalty fees are an essential part of how the franchise business model works, helping to manage and maintain the operation of the original franchised brand.
Money collected from these fees helps build a mutually beneficial partnership between franchisees and franchisors, allowing franchisors to reinvest back into their franchise network, bolstering their brand reputation and presence in the market.
What is a Typical Franchise Royalty Fee?
The cost of a franchise royalty fee will usually depend on several factors, such as the industry the franchise is operating within and how much support the franchisor typically offers.
The most common way to calculate royalty fees is as a percentage of the franchisee’s sales revenue. Generally, royalty fees will be around 5-10% of gross sales.
Types of Franchise Royalty Fee
There are a few different royalty fee types a franchisor may employ for your and their benefit:
Fixed percentage: When you pay a fixed percentage of whatever your weekly/monthly revenue is. This is the most common and easily calculated type.
Increasing percentage: When the franchisor has the right to increase the royalties paid based on things like the location of a franchise.
Decreasing percentage: When the franchisor decreases the cost of royalties as an incentive to ambitious franchisees working hard to make their franchise increasingly profitable.
Fixed royalty: This is when the royalty is a fixed payment not based on sales, meaning every franchisee would pay the same fee every week/month. This is less common as franchisees would have to pay the same even in less profitable periods.
No fee: Some franchises may not require ongoing royalty payments. However, on occasions like this, it may be that franchisees have to buy certain products or services from their franchisor to ensure the latter can still generate income.
Royalty Fee Vs Franchise Fee
When you’re comparing franchises and their costs, you notice the term ‘franchise fee’ also being thrown in the mix. This is not the same thing as a royalty fee and is a separate cost involved in your initial franchise investment.
Royalty Fee: A recurring fee paid by the franchisee (usually monthly or weekly) that tends to be calculated based on a percentage of gross sales.
Franchise Fee: A one-off payment paid by the franchisee to the franchisor when they enter into the franchise agreement. Essentially, this fee allows you to join the franchise in the first place, while the royalty fee maintains your membership.
Are Franchise Royalty Fees Negotiable?
Most of the time, royalty fees are not negotiable and are set as a standard across franchisees. A good royalty structure supports both the franchisee and franchisor, so inconsistent payments can disrupt the franchise system.
While royalties are usually non-negotiable, you may find that other elements of your franchise agreement are, so make sure to talk through your proposed agreement with advisors to ensure it works for you.
Royalty Fees at Esquires Coffee
As a basic guideline, the royalty fees for our coffee shop franchises tend to be set at 6% of gross sales, which is payable weekly.
When done right, coffee shops can be incredibly profitable, and this fee helps us ensure you and the franchise as a whole can continue to thrive. If you’re interested in learning more about franchising with Esquires Coffee and the costs involved, see our franchising FAQs.
For more insight into the franchising journey, read our guide on the key questions to ask a franchisor before you commit to investing.
