Franchise Royalty Fees: What Are They and How Much Should They Be?

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One of the most significant costs involved with running a franchise is the franchise royalty fees, and, in this article, we’re going to be covering everything you need to know about these fees.

Starting your own franchise business is a great way to be in business for yourself but not by yourself as long as you make sure that you know what you’re getting yourself into. Franchise businesses offer many rewards, but there are also regular costs involved, which you need to know before starting your own franchise.

What is a franchise royalty fee?

Once your franchise business is up and running and you start to make some money, your franchisor will usually charge a royalty fee.  In most cases, this is a fee to be paid monthly to the franchisor and can take one of three forms:

A fixed franchise royalty fee is when your franchisor states a set amount you must pay every month regardless of how much money your business has made.

A sales-based franchise royalty fee is when your franchisor charges you a monthly fee which is calculated based on a percentage (for example, 20%) of the takings from your business during the past month.

The sales-based / percentage fee can be further drilled down as follows:

  • Fixed percentage – A set in stone percentage of your takings to be paid in royalty fees each month or quarter.
  • Increasing percentage – A franchisor has the right to increase the royalty fee based on a number of factors, such as location.
  • Decreasing percentage – The franchisor may decrease the royalty fee percentage as an incentive to ambitious franchisees.

A minimum franchise royalty fee is when a franchisor builds themselves a safety net by implementing a minimum royalty. This means that if you don’t make enough sales to achieve a high enough royalty fee, a minimum fee rule will come into play.

The specifics of your fee should be detailed clearly within your franchise agreement.  While there may sometimes be room for negotiation, this is unusual for first-time franchisees.

Why am I charged a royalty fee?

While some may think of the royalty fee as a kind of membership fee for the franchise, it’s actually much more than that.  While the fee does go toward the profit that the franchisor makes, it also goes toward essential parts of the franchisor’s business, including:

  • Marketing and promotion – vital for keeping the brand’s profile optimised at all times
  • Product updates – keeping the brand fresh and relevant
  • Admin tasks, including updates to manuals and branding
  • The growth of the brand, including new offerings and expansion into new territories

All of these things are essential for the franchisor and the franchisee alike in order to keep the business running successfully and attract new customers.

How much will I pay?

Franchise royalty fees can vary widely depending on the brand and the type of fee that you’re committed to.  There’s some debate about whether a fixed fee or percentage-based fee is best for the franchisee – although many feel that the percentage-based fee is the fairer option.

When it comes to figuring out how much you’ll be expected to stump up every month, this is something you should discuss with your franchisor as it can make a big difference to your bottom line. For example, if you have a fixed fee of £100 per month and, in April, your business makes £5000, this is pretty cheap – whereas, if you’re signed up to a 20% royalty fee, you’ll be handing over £1000.  This is a pretty big difference and will need to be factored into your budgeting.

In the event that you find yourself unable to pay your royalty fee, this may be considered a breach of contract and might result in your franchise being withdrawn.

Having said that, when it comes to fees, most franchisors work hard to make these as fair as possible as they will want you to do well and they realises that charging eye-watering fees would be counterproductive.

how much will i payIs my franchise fee tax-deductible?

Yes, franchise royalty fees are tax-deductible as these are legitimate business expenses. However, this gets a little more complex if the monthly fee includes charges for capital equipment.

As with any UK business, you can expect to hand over an amount of cash to the taxman each year to keep your business within the law.  Where this gets a little tricky is the fact that different elements of your business are subject to different tax classifications. For example, some assets may be considered tangible and, these will be treated differently from those which are considered intangible.  Although you will be entitled to claim some items as legitimate business expenses, you shouldn’t expect to claim back the entire amount of capital spent.

While your franchisor may offer some support, most won’t get too involved in your book-keeping and tax affairs, so, if, in doubt, it’s always a good idea to hire a professional as this will save you a lot of time, hassle and money in the long run.

Will my franchise fees change?

Yes and no.  When you sign up for your franchise, the details of the fees should be included in your contract and, unless there’s a particular clause, your franchisor will not be able to change the terms of the fee within the period that the contract covers.

This is, of course, different if you’ve committed to an increasing or decreasing percentage royalty fee rate. They are, however, able to amend this on the renewal of the contract.

Can I negotiate my royalty fee?

In most cases, franchise royalty fees are non-negotiable as they are created to promote fairness and equality across the brand.  While this is the case for new franchisees, if you enjoy considerable success with your business, your franchisor may be open to some negotiation when it comes to renewing your contract.


Franchise royalty fees are pretty much just a fact of life for the franchisor. It may be that you’ve seen a franchise advertised which boasts that there are no such fees applicable but don’t be fooled; if a franchisor isn’t being paid a monthly royalty fee, they’ll be looking to recoup this elsewhere.

When beginning your franchise business, it’s crucial that you understand how your royalty fees work, how much you can expect to pay and, what might happen should you be unable to pay these fees.

In most cases, your franchisor will work with you to ensure that your fees are fair and affordable. They will do all they can to offer incentives to make your target quotas.

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