Franchisee Basics: Royalty Fees

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 obligatory payments that are made on a regular, ongoing basis from the franchisee to the franchisor. Royalty fees can be payable on a weekly, monthly, or annual basis, depending on the franchise system. Types of royalty fees include:

Fixed: A flat fee that remains at the same set number from the beginning to the end of the franchise agreement.
Fixed Percentage: Rather than a set number, the franchisor will determine a set percentage based on the gross sales that the franchise location acquires. It will always remain at this percentage for the entire length of the franchise agreement.
Variable Percentage: This percentage can either increase or decrease depending on several factors. An increasing percentage means the franchisee will pay a higher percentage the more gross sales they obtain, while a decreasing percentage means the franchisee pays a lower percentage as their gross sales increase.
The most common way to calculate a royalty fee is as a percentage of a franchisee's gross sales. This percentage typically ranges from 4% to 12% but can vary widely by industry. For example, a food franchise might have a lower royalty percentage (e.g., 5% to 6%) due to higher sales volume, while a service-based franchise might have a higher percentage (e.g., 8% to 10%) because its business model has different economics.

Royalty fees fund the franchisor's operations and enable them to provide ongoing support and services to the entire franchise network. Royalty fees are viewed as typically covering:

Brand Maintenance: The costs associated with maintaining and building brand recognition, reputation, and intellectual property.
Ongoing Support: Continued access to the franchisor's support team, including field consultants, operational guidance, and administrative assistance.
Research & Development: The development of new products, services, and technology to keep the brand competitive.
Updates and Enhancements: Upgrades to the business system, operating manuals, and technology infrastructure.

It is a frequent misconception that royalties only benefit the franchisor. In a healthy franchise system, these fees are reinvested to strengthen the brand, which in turn benefits all franchisees.

In most cases, a franchise's royalty fees are not negotiable. Franchisors typically have a standardized fee structure to ensure all franchisees are treated equally and to maintain a consistent business model. However, there may be very limited circumstances where negotiation is possible, such as:

Emerging Franchises: Newer, smaller franchise systems may be more willing to negotiate with early adopters to grow their network.
Multi-Unit Deals: A prospective franchisee who commits to opening multiple locations may have more leverage to negotiate a slight reduction or tiered royalty structure.

Generally, franchisees should assume the royalty fees are a fixed part of the franchise agreement. Instead of focusing on negotiation, it's more important to evaluate if the value provided by the franchisor justifies entering into the particular franchise arrangement and committing the fee payments that are required to be a franchise member.

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.

The Basics to Becoming a Franchisee: Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. Read more.

What is a Franchise?

Click on for More Franchising Videos for Franchisees

youtube franchisee lawyer