Royalty Fee

Definition

A royalty fee is an ongoing fee a franchisee pays the franchisor in exchange for the continued right to use the brand, system, and trademarks. In most U.S. franchise systems it is calculated as a percentage of the franchisee's gross sales and paid weekly or monthly throughout the term of the franchise agreement.

The royalty is distinct from the initial franchise fee (paid once, before opening) and from advertising or ad fund contributions (which fund cooperative marketing rather than franchisor operations).

How it appears in an FDD

Royalty fees are disclosed in Item 6: Other Fees of the Franchise Disclosure Document, the table of recurring and contingent payments mandated by the FTC Franchise Rule (16 CFR §436.5(f)).

The Item 6 table typically lists, for each fee:

• The fee's name (e.g., "Royalty Fee" or "Continuing Franchise Fee")
• The amount and formula (e.g., "6% of gross sales")
• When it is due (e.g., "weekly, by electronic funds transfer")
• The remarks (definitions of "gross sales", carve-outs for sales taxes, minimum royalties, and so on)

A typical Item 6 entry reads:

Royalty Fee — 6% of Gross Sales — Payable weekly by EFT, on Tuesday for the prior week's sales — "Gross Sales" is defined in the Franchise Agreement and excludes sales taxes collected from customers and remitted to taxing authorities.

The royalty rate may be flat, tiered (a different percentage at different sales levels), or stepped (rising over time). Some agreements include a minimum royalty that applies regardless of actual sales — a floor designed to protect the franchisor's revenue if a unit underperforms.

Typical ranges in the FranchiseDiff dataset

Across the 154 brands in our dataset that disclose a flat-percentage royalty, the most recent FDDs report a median royalty of about 6% of gross sales, with the middle 50% of brands falling between 5% and 6%. Quick-service restaurants and fitness concepts cluster near the lower end of that range; service brands and education concepts more often sit at the higher end. Some brands quote royalty as a fixed dollar amount per period or per transaction rather than a percentage; those are not included in the percentage figures above.

The dataset snapshot for this entry is rendered above; we refresh it annually.

What "gross sales" means

The royalty's economic impact depends on what counts as "gross sales" for the formula. FDDs vary on this, but most systems define gross sales as the total revenue from goods and services sold at or from the franchised location, including sales fulfilled through delivery aggregators, before any deductions other than sales tax. Common carve-outs include:

• Sales taxes collected and remitted to taxing authorities
• Refunds and bona fide returns
• Employee meals or discounts (sometimes)
• Gift card sales (until redeemed, in some systems)

Royalty on third-party delivery sales — gross of platform fees — is a recurring point of contention; the franchisee usually owes royalty on the customer-paying price even though the franchisee nets less after the platform's commission.

Why royalty rate matters

Royalty is the largest recurring cost for most franchisees and is paid on top of all other operating expenses. A two-percentage-point difference in royalty (say, 5% vs. 7%) on a $1M revenue store is $20,000 a year in additional cost forever, holding everything else constant. Royalty rates rarely fall over the life of a franchise system; when they change, they more often rise at renewal.

Related terms

• Ad fund contribution — separate marketing fee, also disclosed in Item 6.
• Initial franchise fee — one-time payment before opening, disclosed in Item 5.

How to verify

The royalty rate for any brand we cover is shown on the brand's FranchiseDiff hub page and on the comparison view between any two of its FDD years. The authoritative source is always Item 6 of the brand's most recent FDD; you can find that document through the brand directly or through the state franchise registration portals (most filings are publicly searchable in registration states such as Minnesota, California, and Wisconsin).