Royalty Fees paid to Franchisor

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Royalty fees (royalties) are a key component of the financial relationship between a franchisor and a franchisee; with royalty fees being a regular payment that a franchisee makes to the franchisor for the continued use of the franchisor's brand, trademarks, and business system.

• Average Royalty Range: While there is no single standard, the average franchise royalty fee typically ranges from 4% to 12% of a franchisee's gross sales.

• Industry Variation: The percentage can vary significantly by industry. For example, a high-volume business like a food franchise might have a lower royalty percentage, while a service-based business might have a higher one.

• Purpose of Royalties: These payments are the main revenue stream for a franchisor. They are used to fund the ongoing support provided to the franchise network, including:

  • Ongoing training and support

  • Operational guidance and field consultants

  • Research and development of new products or services

  • Maintaining and growing the brand

• Calculation Methods: The most common method is a percentage of gross sales, but some franchises may use a fixed weekly or monthly fee. Some franchisors also have a "minimum royalty fee" to ensure they receive a certain amount each period, regardless of the franchisee's sales.

• Other Ongoing Fees: It's important to note that royalties are not the only ongoing cost. Many franchises also charge a separate advertising or marketing fee, which typically ranges from 1% to 4% of gross sales. This fee is used to fund pooled marketing efforts for the entire franchise system, such as national or regional advertising campaigns.

Before investing in any franchise, it is crucial to carefully review the Franchise Disclosure Document. The franchise disclosure document (and reiterated in the franchise agreement), which is a legal requirement in many Canadian provinces, provides a detailed breakdown of all fees, including initial costs, ongoing royalties, and other charges.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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Key Aspects of a Franchise Disclosure Document: A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system. The franchise disclosure document is intended to help the potential franchisee make an informed investment decision. Read more.

 

Key Aspects of a Franchise Agreement: A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.