What is a Franchise Royalty Fee? Costs, Calculations, and Impact on Profit
Key takeaways:
Understanding franchise royalty fees is crucial for anyone looking to start or join a franchise, as these recurring costs significantly impact your business’s profitability.
- Franchise royalty fees are ongoing payments for using the franchisor’s brand and support. Typically ranging from 5% to 9% of gross revenue, these payments allow access to branding, marketing, and business resources.
- Royalty fees cover brand usage and key infrastructure, but not local costs. While they often include branding, national marketing, pricing guidelines, training, and business systems, franchisees still cover their own labor, marketing, and assets like vehicles or equipment.
- Royalty fees are usually calculated as a percentage of gross revenue. This fee is applied before expenses, affecting your net profit, so it’s important to track sales and follow franchisor guidelines on reporting and calculation.
- Different models exist for collecting royalties. Common models include percentage-based fees, flat rates, or hybrid approaches combining both, allowing flexibility based on franchise size, revenue, and goals.
- Royalty fees are distinct from franchise fees. Royalty fees are ongoing payments, while franchise fees are one-time, upfront costs to join the franchise and cover initial onboarding and rights.
Stay on top of industry tips and practical advice for running your franchise—sign up for the Jobber Newsletter. Sign up here.
Franchises offer recognized branding, marketing support, and a proven business model. But these benefits come with a price tag—the franchise royalty fee.
Franchise royalty fees usually fall between 5-9% of gross revenue, meaning you need to account for them in your pricing, profit margins, and expenses.
Whether you want to start a franchise or join one, understanding franchise royalty fees is essential for running a profitable business. This guide explains what they include, how to calculate them, and how they impact your bottom line.
What is a franchise royalty fee?
A franchise royalty fee is an ongoing payment a franchisee makes to operate under a franchisor’s brand and access business support, systems, and resources. These ongoing payments are usually outlined in a franchise disclosure agreement (FDD).
The average royalty fee for a franchise ranges from 5% to 9% of gross monthly revenue, but can be more or less, depending on the size of the business and the services offered.
For example, a national luxury brand serving high-end clients may charge higher royalties than a smaller franchise focused on a single state and straightforward services.
Franchise business royalty fees are typically collected monthly, but may also be paid on a weekly or biweekly basis, depending on the franchisor.
What do franchise royalty fees include?
Franchise royalty fees typically cover:
- Franchise brand usage and trademarks, like the business name, logo, colors, taglines, and marketing materials for things like signage, uniforms, websites, and vehicle wraps.
- National or regional marketing guidelines, like annual promotions, loyalty and referral programs, ad campaigns, social media support, and templates for websites and promotional materials. Some funds may also be added to a shared marketing pool for large-scale campaigns.
- Pricing suggestions, such as minimum service prices, what to charge for price bundling and tiered packages, how much of a discount to offer, and seasonal pricing.
- Standard operating procedures, like how to accept bookings, send invoices, and process payments, as well as access to any systems required, like a CRM.
- Training and onboarding for new owners, and ongoing business coaching.
- Performance benchmarking and growth goals to help you succeed.
Some franchisors also cover the cost of uniforms, vehicle wraps, and signage, but it depends on the franchise and brand requirements.
Franchise royalty fees don’t cover labor, local marketing, or physical assets like vehicles, office furniture, or equipment. If any are required, the franchisee will have to cover those costs.
How are franchise royalty fees calculated?
Most franchise business royalty fees are calculated based on gross revenue. This is the amount you make in sales before any costs are deducted.
For example, if you make a total of $50,000 in sales for the month, and your franchise royalty is 6%, you will owe the franchisor $3000 regardless of your expenses.
This directly impacts your bottom line. If your expenses for labor, materials, and overhead are $40,000, you will be left with $10,000 before royalties. After paying your $3000 royalty fee, your net profit will be $7000—dropping your profit margin from 20% to 14%.
Franchise royalty fee formula
The formula to calculate accurate royalty fee payments is:
Gross revenue x Royalty percentage
Before you calculate gross revenue, you’ll need to understand what it includes from a franchise perspective. This will vary by franchisor and is typically outlined in your franchise agreement, which should address:
- Whether sales count booked jobs or only completed jobs, and how to handle recurring revenue
- If sales are based on invoiced amounts or collected payments
- How to factor in discounts, refunds, and warranties
- What monthly reporting deadlines are
- Any penalties for late or inaccurate reporting
For a franchisee, staying on top of what you owe each month is relatively straightforward. Just make sure to base gross revenue on your franchisor’s guidelines, track sales, and pay close attention to cutoffs.
As a franchisor, tracking multiple franchise royalties is more complicated. You may have to oversee royalty collection from multiple locations, as well as ensure reporting accuracy and calculate fees.
Using royalty calculation software like Jobber to automate the process can save time, reduce errors, and help you stay on top of revenue and compliance across your franchise network.
What are the different types of franchise royalty fees?
Collecting a percentage of gross sales revenue is the most common way for franchises to calculate royalty fees, but it isn’t the only method.
Depending on the size of the business, services offered, growth goals, and other factors, types of franchise royalty fees include:
1. Percentage
The franchisor collects a percentage of the gross sales revenue. The amount may be fixed (the same each month) or variable, based on sales.
For example, some franchisors offer lower percentages the more gross sales a franchisee has to reward growth.
2. Flat rate
A fixed dollar amount that the franchisor collects regardless of the franchise’s sales revenue or profitability. For example, a franchisor may charge $2500 per month whether the franchise earns $50,000 or $150,000 in gross sales.
3. Hybrid
A hybrid franchise royalty fee combines a percentage and a flat rate. Both rates are typically lower than they would be if they were calculated individually.
For example, a flat rate of $1500 each month plus 2% of gross sales revenue on anything above $25,000.
This guarantees the franchisor a flat rate each month and ensures the franchisee only pays an additional amount if their gross sales revenue exceeds the threshold.
So, if:
- The flat rate royalty fee is $1500
- The percentage threshold is $25000
- The franchisee makes $30000 in gross sales revenue for the month
The franchisee will pay $1500 plus 2% of $5000, which is $100, for a total monthly amount of $1600.
Franchise royalties vs. franchise fees
If you own or want to join a franchise, you need to consider both franchise royalties and franchise fees.
Franchise royalties are ongoing payments franchisees make to franchisors in exchange for access to the brand and continued use of their resources. They’re typically:
- Paid on a recurring schedule
- Variable and based on gross sales revenue
Franchise fees, on the other hand, are a one-time, upfront cost franchisees pay to franchisors to buy into a franchise. They’re typically:
- Paid upon joining a franchise
- Used to cover onboarding and initial rights
- A fixed amount
Essentially, a franchise fee is what allows a franchisee to join a franchise, whereas a royalty is what gives them continued access to the brand’s assets and resources.
Building a franchise business
Whether you’re considering franchising your own business or buying into an existing one, understanding the fees you pay or receive is essential. They’re what help you to grow, set goals, and stay profitable.
Before moving forward, review projected royalties, pricing, and profit margins so you can make an informed decision and ensure your franchise is a success.
Frequently Asked Questions
-
To incentivize franchisee performance and growth, franchisors can:
• Offer tiered royalty percentages that decrease based on revenue increases. For example, 7% for gross sales up to $25,000, 5% for $25,000-$50,000, and 3% for $50,000+.
• Reduce royalties during promotions or seasonal periods to encourage more sales and allow them to make more profit.
• Give performance rebates for exceeding sales goals, providing excellent customer service, or meeting pre-determined goals.
These work to encourage franchisees to make more sales and turn a higher profit while ensuring you, as the franchisor, collect baseline royalties.
-
As a franchisor, you will need to provide pricing guidelines to your franchisees.
To provide accurate pricing that includes job costs, profit, and royalties, you should:
1. Use job costing to determine labor, materials, overhead, and direct costs associated with each service.
2. Calculate your profit margin.
3. Add in your royalty percentage.
For example, let’s say base costs for a job were $250, and you want your franchisees to earn a 20% profit margin, and your royalty fee is 6%. That means you would need to add up:
• $250 for the base service
• $50 for a 20% profit margin
• $19 to cover the royalty fee
So your total suggested price for the service would be $319.
Use the same process for each service to set prices that ensure you and your franchisees are profitable.