What is a Royalty Fee and Why is it Necessary?

Royalty fees are one of the core elements of franchising, yet they remain one of the least understood. For many first-time franchisees, the variety of costs involved can feel overwhelming. Understanding how royalty fees operate is essential for comparing franchise opportunities, evaluating long-term profitability and choosing the right network for your goals.

If you want to understand franchising costs with confidence, this guide is the perfect place to start.

What Is a Royalty Fee?

A royalty fee is an ongoing payment that franchisees make to the franchisor after joining a franchise network. It is separate from the initial franchise fee, which is a one-time payment for onboarding, initial training and the right to operate under the brand.

The royalty fee is the financial contribution that franchisees make to benefit from the continuing value of the franchise. It allows the franchisor to support the network, maintain brand standards and keep the business model competitive.

In simple terms, the royalty fee is the cost of the remaining part of a system that offers proven methods, recognised branding, ongoing training and structured support.

What Do Royalty Fees Pay For?

Royalty fees fund the long-term operation of the franchise system. While the exact allocation varies between networks, they typically cover:

1. Ongoing Training and Support

Franchisees receive continued guidance from the franchisor. This may include refresher training, operational assistance, performance reviews, coaching, site visits and access to support teams.

2. National and Regional Marketing

Many franchisors use a portion of royalty income to run advertising campaigns, promotional activities, brand awareness strategies and digital marketing support.

3. System Development and Updates

Royalty fees help fund improvements to operating manuals, technology systems, brand standards, new products and business innovation.

4. Administrative and Network Management Costs

Daily operations of the franchise network require staff, systems, compliance teams and infrastructure. Royalty fees ensure these essential components function smoothly.

5. Recruitment and Onboarding of New Franchisees

Expanding the network strengthens brand recognition for every franchisee. Royalties contribute towards recruitment, training and support of new entrants in the system.

Without ongoing royalty income, franchisors would be unable to maintain the service levels that keep the network competitive.

Why Are Ongoing Fees Necessary?

Royalty fees are a primary source of revenue for the franchisor. Although the franchisor earns income from these fees, much of it is reinvested into supporting the network. Unlike independent businesses, franchise networks require continuous development, quality control and marketing to maintain consistency.

Royalty fees ensure that:

• franchisees receive ongoing value after launch
• the brand stays competitive
• the business model evolves over time
• every location maintains consistent standards
• the network can grow sustainably

Without these fees, the entire franchise system would weaken. Strong networks are built on continuous investment.

How Often Do Franchisees Pay Royalty Fees?

Royalty fees are usually paid monthly or quarterly. The structure varies between franchise systems, and it is important for new franchisees to understand how their fee will be calculated.

Below are the most common methods used in the UK.

1. Percentage of Gross Sales

This is the most widely used model. The fee is calculated as a percentage of the franchisee’s gross sales before expenses.
There are three variations of this structure:

Fixed Percentage: A fixed percentage remains the same each payment period. Franchisees always know what proportion of their revenue will be allocated to royalties.
Increasing Percentage: The percentage increases based on factors such as location, performance or market conditions. Busy and high-performing areas may attract higher percentages due to increased earning potential.
Decreasing Percentage: As franchisees earn more, their royalty percentage drops. This rewards strong performance and incentivises growth.

2. Fixed Royalty Fee

A fixed fee stays the same every month, regardless of turnover. This model provides stability for franchisors but may be less appealing for franchisees who must pay the fee even during quieter trading periods.

3. Minimum Royalty Fee

Some networks set a minimum amount that must be paid, even if gross sales fall below projections. This protects the franchisor from fluctuations but can create pressure for new franchisees during the early stages of trading.

4. No Royalty Fee

A small number of franchises do not charge royalties. Instead, the franchisor generates income through alternative methods. This may include requiring franchisees to purchase stock exclusively from the franchisor or approved suppliers. Although attractive at first glance, these arrangements can be just as costly in the long term.

How to Know If a Royalty Fee Is Fair

A fair royalty structure balances profitability for the franchisee with sustainable growth for the franchisor. A conscientious franchisor will calculate royalty fees by considering:

• the franchisee’s profit margins
• the support and services provided
• the cost of running the network
• industry standards
• competitor pricing
• the brand’s value and strength

Royalty fees set too high can restrict franchisee profitability. Fees set too low can reduce the franchisor’s ability to support the network. The ideal structure benefits both parties.

• When evaluating a franchise, always review:
• the royalty percentage
• how it is calculated
• how it may change over time
• what support you receive in return
• the franchisor’s track record
• the financial projections provided

A healthy franchise fee model always aligns incentives on both sides.

Key Considerations for Prospective Franchisees

Before committing to any franchise agreement, keep the following in mind:

• There are no universal guidelines for setting royalty fees, so structures vary widely.
• Some franchisors calculate fees carefully based on operational needs.
• Others may copy competitor rates or choose numbers without a clear rationale.
• Seek advice from a financial advisor to understand the true cost of joining a network.
• Do not compare fees in isolation. Evaluate the value you receive in return.
• A higher royalty fee may be justified if the franchisor provides exceptional support and brand strength.
• A low fee is not always a bargain if ongoing support is limited.

Understanding the fee structure early prevents financial surprises later.

Royalty Fees Are Essential for a Strong Franchise System

Royalty fees form the backbone of franchising. They allow franchisors to maintain their brands, support their franchisees and keep the business model thriving. For franchisees, understanding royalty fees is crucial for budgeting, forecasting profitability and choosing the right franchise network.

With a clear understanding of how these fees work and what they fund, franchisees can make confident and informed decisions that set them up for long-term success.