Franchise Royalty Fees Explained: What a Buyer Sees in Your Earnings
When you sell your franchise, a buyer reads your earnings after your franchise royalty fees have come out, so the royalty shapes the number they see. A royalty is a fee you pay your franchisor under your franchise agreement, and the franchise disclosure document lists it in Item 6, headed "Other Fees" (16 CFR 436.5(f)). In short, the agreement sets the royalty, Item 6 shows it, and your books show what it cost you. This article covers what to look for in each, and how the royalty reaches a buyer. Rates differ from brand to brand, so your own agreement is the one to read.
What are franchise royalty fees?
They are fees a franchisee pays the franchisor, set by the franchise agreement. The rule asks a franchisor to disclose "all other fees that the franchisee must pay to the franchisor or its affiliates," and names "royalties" first among its examples (16 CFR 436.5(f)).
Item 6 is a table with four columns: the type of fee, the amount, the due date, and remarks. The remarks are where a franchisor says whether a fee is uniformly imposed and whether it is refundable. Your own disclosure document holds your franchisor's answers.
How is a royalty set?
Your agreement decides, and the rule asks the franchisor to disclose any formula used to compute a fee (16 CFR 436.5(f)). The rule's own example is a percentage of gross sales, which it says is acceptable "if the franchisor defines the term 'gross sales.'" That is a note about how a formula must be described, not a statement about what franchisors charge.
Royalty structures vary from one franchisor to the next. These are the questions to read for in your own agreement, not a list of what yours says.
- What is it charged on? A share of sales, a fixed amount, or something that changes as sales change.
- How is the base defined? If it is gross sales, which sales count and which are left out.
- Is there a minimum? Some agreements may set one, so check yours.
- Can it go up? The rule asks the franchisor to disclose the formula for an increase, or the maximum increase.
- When is it due? Item 6 has a column for the due date.
Are royalties the only fees I pay my franchisor?
No. Item 6 is a table of all other fees, and royalties are one row. The rule names others as examples, including advertising, advertising cooperatives, audits, accounting, inventory, transfers and renewals (16 CFR 436.5(f)). Initial fees sit in a separate item, Item 5.
Two rows matter to a seller. The rule lists transfers and renewals as example fee types, so the fee on your own sale, if your franchisor charges one, belongs in this table. A list of examples is not a promise that your franchisor charges every one of them. Read the whole table, because a buyer will add the rows up.
How do franchise royalty fees reach a buyer's reading of my earnings?
A royalty is a cost that sits between your sales and your profit, so a buyer reads your earnings after it has come out. A buyer also wants to know whether the same royalty will apply to them. Here is what a buyer may look at.
- Where it shows on your books. A buyer may want to see the royalty as its own line, and the advertising fee as another, so the earnings can be read after both. If your books lump them together, a buyer may ask you to split them.
- Whether the buyer pays what you pay. Whether a buyer takes over your existing agreement or signs the franchisor's current form depends on your franchisor. The rule's Item 17 has rows on whether the franchisor approves a transfer and on the conditions for approval (rows (l) and (m), 16 CFR 436.5(q)). They are row labels, and they do not say what your franchisor does. If the buyer's royalty may differ from yours, a buyer may read your earnings with that in mind.
- Whether anything is due or late. Your agreement may say something about the royalties being current when you transfer. Item 17 row (m) is the place to look, and your franchise attorney can read it.
- How long the agreement has left. Remaining term and renewal timing affect value and timing, so a buyer may ask how many years of royalties come with the franchise.
How a buyer turns all this into a price is a valuation question. The part you control is knowing your own royalty and fee rows before a buyer asks. Our articles on how to sell a staffing agency franchise and how to sell a restaurant franchise take the question into two kinds of business.
What should I do first?
Four steps, all within your control:
- Ask your franchisor in writing for its current disclosure document, and keep your old copy.
- Find Item 6 and write down every row: the fee, the amount or formula, the due date and the remarks.
- Match each row to your books, so you can show what you paid for the royalty and for each other fee.
- Ask your franchisor in writing what a buyer would pay and what happens to the fees on a transfer, and have a franchise attorney read the reply.
Then get a current number for your own location. A free Opinion of Value is that number, and it commits you to nothing. It is a personal valuation page with a custom video walkthrough recorded by a senior advisor, free and with no card on file. Request your free Opinion of Value and tell us what your royalty rows say.
If you decide to sell, we help with buyer screening, due diligence and offer negotiation, franchisor approval, paperwork and closing steps, and confidentiality is available throughout. Our sell a franchise page shows how we work with owners.
For the law on any of this, your franchise attorney is the person to ask, and your CPA for how fees show in your books. This article is general information, not legal or accounting advice.
Frequently asked questions
The rate sits in the agreement your franchisor signed. Ask your franchisor in writing whether any change is open to you, and have a franchise attorney read the reply before you act.
The rule text lists them as separate examples in the Item 6 table: royalties, advertising and advertising cooperatives (16 CFR 436.5(f)). Your agreement says what each one covers and what it is charged on.
Not necessarily. A buyer reads earnings after every fee, and may pay a different rate than you do. A valuation looks at your own location, which is why it helps to have your own number before you list.