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When running a franchise, a franchisee operates one of the franchisor’s branches, and a portion of the profits is directed to the franchisor as compensation for providing the established business model, support, and brand recognition.
These are known as franchise royalties.
In other words, the franchisee pays money to the franchisor for the use of their business system and ongoing support.
Franchisees will typically pay franchisors for a variety of expenses at the outset of the business relationship – covering items such as training, initial legal documentation and support services.
Franchise royalties, however, are an ongoing fee for the use of the franchisor’s brand, systems and support infrastructure. The most important aspects to understand about franchise royalties are:
- The nature of franchise royalties
- How they differ from other types of royalty payments
- The distinction between franchise fees and royalty payments
- The purpose of franchise royalty payments
- Payment percentage
Franchise royalties are not a compulsory element of a Franchise Agreement – some business owners might negotiate to replace them with a fixed monthly fee instead.
However, regardless of whether you are a franchisor or franchisee, it’s essential to understand royalty payments and their role in franchise relationships. Read on to learn more about how franchise royalties work in today’s marketplace.
What Are Royalties?
Generally speaking, royalties are payments made for the use of an asset, idea or piece of intellectual property. Typically, one party pays another a fee to utilise something that is owned or controlled by the other party.
Many industries employ royalties as a standard payment method – from creative works such as music and literature to the commercial use of technology and branding.
| Example For instance, imagine you have composed an original piece of music and a local theatre wishes to use it as background music for their show. An agreement to pay royalties each time your music is utilised in the theatre’s performances would be applicable. |
Royalties are a common way for creatives – including artists, writers and musicians – to earn ongoing income from the use of their work.
There is no absolute ceiling or minimum for the amount payable; royalties depend on the parties involved, the extent of use, the commercial value of the asset, and other negotiated terms.
It is therefore crucial that all royalty details are clearly set out in the negotiations and formalised within the agreement between the parties.
Do Franchises Pay Royalties?
Yes, franchises commonly incorporate agreements that require the payment of royalties.
Typically, the franchisee will pay a franchise royalty fee to the franchisor on a monthly basis. While there is no legal obligation to adopt a royalty payment system, many businesses find it a valuable model to pursue.
A franchise royalty fee not only helps cover the costs incurred by the franchisor for expanding the franchise network, but it also strengthens the connection between the franchisee and the head office.
What Is A Franchise Royalty?
Once a franchisor and franchisee have established their agreement and the franchisee begins operating the business in a new location, profits will start to be realised.
The franchisee then pays the franchisor a percentage of those profits as a monthly fee, known as the franchise royalty fee.
In 2025, the percentage of profits paid as royalties typically ranges between 5 and 6 per cent, although in some sectors or models it might be as high as 15 per cent – this will depend on the specific agreement and prevailing industry benchmarks.
In many ways, franchise royalty payments function similarly to other royalty arrangements. In exchange for leveraging the franchisor’s business model, intellectual property, products and brand reputation, the franchisee remits a percentage of its earnings for the duration of the agreement.
However, franchise royalties differ from standard royalty payments in several fundamental ways – read on to discover more details.
What Is The Difference Between Franchise Royalties and Franchise Fees?
Franchise fees are usually a one-off payment made when the franchise relationship is established. This fee covers the initial costs associated with launching a franchise, such as:
- Lease Agreement expenses
- Intellectual Property rights (you may need an IP Licence)
- Legal expenses
Franchise royalties, on the other hand, are ongoing payments calculated as a percentage of the franchisee’s earnings for each period, reflecting the continued use of the franchisor’s brand, systems and support services.
| Example Erin has invested in a clothing boutique franchise from her franchisor, Claire. According to their Franchise Agreement, Erin is to pay Claire 10% of the profits the boutique earns each month as a franchise royalty fee. Last month, the boutique earned $10,000 in profits. As per their agreement, Erin paid Claire $1,000 in royalties. |
You may be wondering, “If a franchisor is already receiving an initial franchise fee, why is an ongoing royalty fee required?”
The answer is that royalty fees not only provide the franchisor with ongoing profits and incentivise them to continue investing in and growing the brand, but they also ensure that support, training, and administrative services are continuously maintained—and indeed enhanced—to benefit all parties involved.
What Does A Franchise Royalty Payment Cover?
A franchise royalty payment generally covers the costs associated with supporting franchisees and operating the overall network. These expenses can include:
- Marketing costs (for example, contributions to a Marketing Fund)
- Training resources
- Equipment provided to support operations
- Oversight and ongoing support
- Administrative and operational management
- Technology and digital support systems
In essence, the franchisor manages many of the financial and administrative tasks that enable franchisees to operate efficiently, and the royalties serve as compensation for these ongoing efforts.
How Do We Calculate Franchise Royalties?
How much you pay in royalties depends on the franchise model and its commercial strengths. For example, a large franchise with national or global brand recognition in 2025 may charge a higher percentage, reflecting its advanced support network and robust market position.
Conversely, smaller franchise operations may incur a lower fee, in line with their profit potential and associated risks.
It’s always wise to seek the advice of a financial professional when determining the appropriate royalty percentage, to ensure that you’re allocating your funds in a way that supports your business growth.
Why Do Franchise Owners Pay Royalties?
As mentioned earlier, royalties enable franchisors to earn ongoing revenue from managing multiple franchise locations. Essentially, these payments serve as compensation for the continual support and investment made in the franchise network.
The fee must be balanced to ensure that the franchisee retains enough capital to run the business profitably while also providing the franchisor with funds to support network-wide expansion and innovation.
However, the franchisor must also receive sufficient funds to support ongoing expansion – the fee paid to the franchisor not only generates revenue but also provides additional capital to invest in further growth of the business.
In 2025, technology continues to transform royalty payment systems. Many franchisors now employ advanced digital platforms that offer real-time performance tracking, streamlined reporting, and automated fee calculations. This ensures transparency and efficiency, benefiting both the franchisor and the franchisee as they adapt to the evolving market landscape. For more insights on managing digital compliance in your business, refer to our updated guide on Legal Requirements for Starting a Business.
In addition to consulting a financial advisor, we encourage you to speak with a lawyer about your options. Franchising is a complex landscape, and it’s important to ensure your arrangements comply with current standards – such as the updated Franchising Code of Conduct—to safeguard your interests.
What Is The Difference Between Regular Royalties & Franchise Royalties?
Regular royalties are typically paid for the ongoing use of an asset; if the asset is no longer used, the royalties cease.
However, a Franchise Agreement is a binding contract. This means that a franchisee cannot simply stop ‘using’ the franchisor’s system to avoid paying royalties. The ongoing payment obligation is an integral part of the franchise relationship.
Let’s look at this in more detail with an example.
| Example Allison is a wildlife photographer and Helen operates a well-respected nature blog. Helen requests permission to use one of Allison’s photos on her website banner. Allison agrees to allow its use under a Licence Agreement – she does not sell the rights, but instead, Helen pays Allison royalties from the income generated by her blog each month. After a few months, Helen switches to using a different photo by another photographer, terminates the Licence Agreement with Allison, and consequently ceases the royalty payments. |
In many cases, royalty payments cease once the underlying asset is no longer in use.
However, because franchise agreements are more complex and binding, the royalty payments continue for the duration of the contract, regardless of changes in the level of active ‘use’.
Key Takeaways
There are many expenses associated with franchising a business, whether you are a franchisee or a franchisor. Royalties are one of the main fees, and it’s crucial that both parties understand how they work to avoid complications down the track.
All details regarding franchise royalties should be clearly defined in the Franchise Agreement from the outset. This is a negotiable aspect, so ensure that you plan it carefully and consider your franchise’s budget and growth strategy.
We have a number of resources to guide you through various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
In summary, whether you are establishing your franchise or renegotiating existing terms, understanding the nuances of royalty payments is essential for long-term success. Keeping up to date with emerging trends and technology in franchise management allows both franchisors and franchisees to adapt and thrive within the competitive market landscape of 2025.
If you would like a consultation regarding franchises and royalty payments, you can reach our franchise lawyers at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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