What Are Franchise Royalties?

If you’re exploring a franchise, “royalties” will come up quickly. They can look like a simple percentage on paper, but they’re a core part of how a franchise system works and how your relationship with the franchisor is funded.

In Australia, understanding how franchise royalties are calculated, what they cover, how they differ from other fees, and where they sit legally in your documents will help you assess whether the model is commercially viable for you.

In this guide, we unpack franchise royalties in plain English so you can make confident decisions, negotiate on sound terms and set your business up for success.

What Are Franchise Royalties?

Franchise royalties are ongoing payments a franchisee makes to the franchisor for the right to operate under the brand and system. They’re usually paid regularly (weekly, fortnightly or monthly) and are separate from the upfront franchise fee you pay to get started.

Think of royalties as the price of accessing an established business model - the brand, know‑how, systems, training and ongoing support that (ideally) give you a head start compared to building from scratch.

In Australia, your royalty obligations must be set out clearly in your Franchise Agreement, along with any other fees you’ll be expected to pay (for example, marketing fund contributions, technology fees or rebates). Before you sign, it’s wise to have the entire agreement reviewed by a franchise lawyer so there are no surprises later.

How Are Franchise Royalties Calculated?

Franchise systems use several common methods. The right approach depends on the industry, margins and how the brand supports franchisees.

Percentage Of Gross Sales

The most common model is a percentage of gross sales (also called gross revenue or turnover). Typical ranges are 4%-10%, but the right number depends on your sector and cost structure.

“Gross” usually means sales before expenses, discounts and most deductions. Make sure the definition in your agreement is crystal clear - including how refunds, gift cards, delivery platform fees and GST are treated in the calculation.

Flat Fee (Fixed Royalty)

Some franchises charge a fixed weekly or monthly fee. This can be attractive if you expect strong sales growth (your royalty won’t rise with revenue), but it can be harder to manage in a slow period because the fee doesn’t scale down.

Hybrid Or Step‑Scale Models

Hybrid structures combine a base fee with a smaller percentage of sales, or they use tiered percentages that change once you hit certain revenue thresholds. These models aim to balance predictability with fairness as your business grows.

Minimum Royalties And Shortfalls

Many agreements set a minimum royalty. If your percentage‑based royalty falls below that minimum in a period, you pay the difference. Check whether minimums increase annually and whether they apply during ramp‑up periods or force majeure events.

Marketing Fund Is Not A Royalty

Marketing or brand fund contributions are separate from royalties, even if they’re collected at the same time. The fund is typically used for network‑wide advertising and brand campaigns, while royalties contribute to the franchisor’s ongoing support and system development.

How Are Royalties Collected?

Most modern systems use integrated point‑of‑sale (POS) or direct debit to calculate and collect royalties automatically. Your agreement should explain access to sales data, reconciliation processes, audit rights and how disputes are handled if figures don’t match.

What Do Franchise Royalties Pay For?

Royalties are meant to fund the franchisor’s ongoing obligations and the value you receive from being part of the network. While each system is different, royalties typically cover:

• Brand stewardship and national strategy, including protecting and growing the brand
• System development and updates to operating manuals, technology and processes
• Training, onboarding and refresher programs for you and your team
• Operational support, field visits and performance coaching
• Supplier relationships and network buying power
• Compliance tools and quality assurance programs

It’s reasonable to ask a franchisor to explain how they invest royalty income in the system. While you won’t control their budget, transparency helps you evaluate value for money and whether the support aligns with the royalty level.

Royalties Versus Other Ongoing Fees

To assess total cost, step back and list every recurring charge in your agreement. Common items include:

• Royalties (percentage or fixed fee)
• Marketing/brand fund contributions
• Technology or software subscriptions
• Training fees (initial and ongoing)
• Local advertising commitments
• Product or supply rebates and mandated minimum purchases

The combined effect of these charges matters more than any single fee in isolation. Model different sales scenarios to see how each fee impacts your bottom line.

Where Do Royalties Sit In Your Franchise Agreement?

Your royalty obligations should be front and centre in the financial terms of your Franchise Agreement. Look closely at:

• Calculation method and definitions of “gross sales,” “net sales” and excluded revenue
• Payment frequency, direct debit authority and reconciliation timelines
• Minimum royalty levels, annual increases and indexation
• Audit rights, record‑keeping and consequences for under‑reporting
• Suspension or relief during closures, renovations or supply disruptions
• What happens on sale, transfer or termination - including any trailing fees

In Australia, franchisors must also comply with the Franchising Code of Conduct (administered by the ACCC), which requires clear disclosure of all fees. Before signing, many franchisees get an independent agreement review so they understand the commercial risk and can negotiate practical refinements.

Disclosure Documents And Financial Information

Beyond the agreement, the franchisor’s disclosure document should list all ongoing fees, when they’re payable and how they’re calculated. Ask for details on typical unit financials (where available) and speak with current franchisees about how the royalty feels in real life.

Negotiating Royalty Settings

Not every term is negotiable, but reasonable adjustments are sometimes possible - for example, a ramp‑up period, clarifying excluded revenue, or aligning minimum royalties to local market factors. A tailored Franchise Agreement that accurately reflects the parties’ intent can prevent disputes later.

Legal And Compliance Considerations In Australia

Royalties don’t exist in a vacuum. They sit within a wider legal framework that protects both franchisees and consumers. As you evaluate fees, keep these areas in mind.

Australian Consumer Law (ACL)

Your franchise will deal with customers daily, so compliance with the Australian Consumer Law is essential - from truthful advertising to refunds and warranties. Misleading conduct can attract penalties, so ensure your marketing, pricing and customer claims align with the ACL.

Intellectual Property (IP)

Franchising is built on IP. The franchisor licenses you to use their brand, logos and systems. The agreement should confirm the franchisor owns the IP and has the right to license it. If you plan to co‑brand or develop local sub‑brands, consider whether separate permissions or a registered trade mark are needed.

Privacy And Data

Most franchise systems collect personal information through POS systems, apps or loyalty programs. If you collect personal information, your business may need a clear, compliant Privacy Policy and sound data practices that align with the franchisor’s tech stack and Australian privacy law.

Employment Law

If you employ staff, you must meet Fair Work obligations, pay correct award rates and keep accurate records. Having a well‑drafted Employment Contract and basic workplace policies helps set expectations and reduces risk across your team.

Business Structure And Governance

Consider operating the franchise through a company to separate personal assets from business risk. Core governance documents like a Shareholders Agreement (if you have co‑owners) and a Company Constitution can help you agree on decision‑making, profit distributions and exit terms up‑front.

Taxes And GST

Royalties are typically subject to GST if the franchisor is registered, and they’re generally deductible business expenses for the franchisee for income tax purposes. Always confirm how GST is handled in your agreement and speak with your accountant about the tax treatment in your circumstances.

Dispute Resolution And Enforcement

The Franchising Code includes a mediation framework to help resolve disputes cost‑effectively. Your agreement will also set out breach, termination and step‑in rights. Clear, proportionate enforcement terms (for under‑reporting, non‑payment or brand standards breaches) protect the system while giving franchisees a fair chance to remedy issues.

Common Pitfalls And Practical Tips

Royalties are only one part of the commercial picture. Here are frequent traps we see - and how to manage them.

Not Modelling Realistic Scenarios

Calculate your expected royalties, marketing fund contributions and other fees across conservative, mid and optimistic sales scenarios. Pressure‑test your cash flow with seasonality, promotions and potential delivery platform commissions to understand your real net margin.

Unclear “Gross Sales” Definitions

Ambiguity around what’s included in sales causes disputes. Ensure the agreement defines sales clearly (including treatment of discounts, staff meals, vouchers, third‑party delivery, refunds and GST) and matches how your POS reports data.

Overlooking Minimum Royalties

Minimums can bite during slow periods or unexpected disruptions. Ask about relief in specific circumstances, how minimums are indexed and whether they pause during mandated closures, major refurbishments or supply interruptions outside your control.

Confusing Marketing Fund With Royalties

They’re separate. Check where the marketing fund is spent, whether there are audited statements and how local area marketing obligations interact with the national fund. Your royalty shouldn’t be funding advertising that should come from the marketing pool.

Underestimating Training And Support Value

Two brands might charge the same headline royalty, but one could deliver far more support, technology and brand equity. Spend time with current operators, ask for examples of system improvements and look at how quickly the network responds to change.

Signing Before Independent Advice

Franchise documents are complex and long‑term. A short investment in an independent review can save significant cost (and stress) later. If you’re a franchisor building your network, getting your templates right from the start with an experienced franchise lawyer will help you grow sustainably and fairly.

How Franchisors Can Set Royalties Responsibly

If you’re building or refreshing a franchise model, setting a royalty that’s sustainable for both sides is critical.

• Start with unit economics: model franchisee profitability at realistic sales levels after royalties, fund contributions and fees.
• Align incentives: consider tiered royalties that reward growth, or early ramp‑up relief to support new sites reaching breakeven.
• Be transparent: disclose all fees clearly and provide worked examples of royalty calculations and minimums.
• Protect the brand: ensure your IP licence terms, standards and audit rights are clear and proportionate.
• Document properly: robust, plain‑English documents reduce friction - it’s worth investing in well‑drafted agreements and compliant disclosure.

When your legal suite is in order and clearly communicates commercial realities, you build trust with candidates and set your network up for consistent performance.

What To Look For Before You Sign

Before committing to a franchise, work through a simple due diligence checklist focused on royalties and total cost:

• Confirm the royalty calculation, frequency and minimums with worked examples.
• Review all other recurring fees and model combined impact across multiple scenarios.
• Match the agreement’s definitions to what your POS can actually report.
• Ask current franchisees about real‑world profitability after all fees.
• Check your obligations around data sharing, privacy and tech stack alignment with your Privacy Policy.
• Make sure the agreement, disclosure and manuals are consistent and up to date.

If anything is unclear, pause and get independent advice. It’s much easier to clarify terms now than to resolve a dispute later.

Key Takeaways

• Franchise royalties are ongoing payments for brand access, systems and support; they’re distinct from marketing fund contributions.
• Common royalty methods include a percentage of gross sales, fixed fees and hybrids - always check definitions, minimums and audit rights.
• Royalties should fund tangible value: training, technology, support and brand growth that help your unit perform.
• Your obligations must be set out clearly in a well‑drafted Franchise Agreement and supported by compliant disclosure.
• Plan for compliance across the board - the ACL, IP licensing, privacy, employment and tax - not just the royalty clause.
• Model realistic cash flows including all fees, and get an independent agreement review before you sign.

If you’d like a consultation about franchise royalties, disclosure or your Franchise Agreement, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.