Franchise Terminology

What are Franchise and Royalty Fees?

While there are many lucrative opportunities that come with buying a  franchise, they are still a hefty investment. While there are many contributors to the total upfront cost of the franchise opportunity, two major factors include franchise and royalty fees.

 Franchise fees are the cost of entry for owning and operating a franchise business. Typically, these fees range from $20,000-$50,000, according to Vetted Biz’s analysis of 1,800+ franchises. Royalty fees are a percentage of revenue (usually around 4-12%) that franchisees (owners of franchises) must pay to franchisors (original company selling the franchise).

 Key Facts To Understand About Franchise and Royalty Fees

Franchises are a significant investment, and therefore it is important to fully understand all the fees and costs that go into them. 

•             What determines royalty fees?

The royalty fee percentage is highly dependent on the type of business franchise in consideration. High sales volume franchises such as food franchises bring in a lot of revenue, so they charge a lower royalty. On the other hand, lower sales volume franchises that bring in less revenue charge higher royalties.  However, the royalty collected by the franchisor is similar because the percentage is being taken out of a smaller amount.

 •            Why are franchise fees necessary?

Although franchise fees may be steep, they should not deter potential investors. As mentioned before, franchise fees are the cost of entry and allow the investor to receive the full set-up of the business they are about to operate. In other words, these fees must be paid because they act as a license to own and operate the business.

•             Master Franchises

Franchise fees are also different for master franchises, which allow investors to sell franchises within a large, specified geographic area. According to the SBA, these fees can exceed $100,000.

 Want to learn more about the franchise and royalty fees of a business you are interested in investing in? Or, are you simply a potential investor interested in learning about franchises as a whole?