What Are Franchise Royalties and How Do They Work?

Royalties are the ongoing percentage of revenue a franchisee pays to the franchisor for the right to continue operating under the brand and using the system.

Standard Royalty Structures

Most franchises charge 4–10% of gross sales. Food: typically 5–8%. Services: typically 6–10%. Some concepts charge a flat monthly fee instead, especially in the lower-investment service categories.

Gross Sales vs. Net Sales

Royalties are almost always based on gross sales, not net. That distinction matters in a low-margin business: a 7% royalty on gross may consume 25–35% of net operating profit.

Beyond the Royalty Line

Plan for ad fund contributions (1–4%), technology fees (often a flat monthly charge), and any mandatory supply markups. The all-in ongoing cost typically lands at 10–14% of gross sales.

What You Get in Return

Brand, marketing, supply chain leverage, technology, ongoing training, and franchisor R&D. The right way to evaluate royalties is to compare your projected revenue with the brand to what you'd produce independently.