Why Pay Franchisor Royalties?

The first point to make about Royalties is that good Franchise systems should look at them not as a payment but rather as a remittance. It is the Franchisor’s share of the income derived from customers or clients. The Franchisee collects that fee along with all other revenues from the customer.

It’s an important concept because it emphasizes that the customer ultimately pays for everything, including the Franchisor’s royalty, the Franchisee’s overhead, all costs of sales, employee’s salaries, and the Franchisee’s profit. Therefore it’s all about the customer – as it should be.

The Franchisee should want the Franchisor to earn a significant amount of royalties because that’s really the oil that makes the engine run. Each Franchisee collects and remits a small portion of that oil to the Franchisor. All elements of the system can continue to improve as long as the royalty stream is strong.

The Franchisor’s royalty will be based on the fact that they have provided a system and strategy that has ultimately served the customer. The Franchisee delivers that system to that customer. The royalty represents the Franchisor’s share based on the various parts of the Franchise system, which has four elements.

The four elements of a Franchise are:
• Brand
• Operating System
• Support System
• Franchisee

Brand – the name associated with the services delivered in a memorable and satisfying experience to the customer.  
Operating System – institutionalizes the excellent service delivered in a memorable experience so it can be done over and over again from Franchise to Franchise in a consistent manner.
Support System – helps the Franchisee get better and better at delivering the service in a memorable experience & helps a Franchisee improve their performance
Franchisee – the individual motivations or reasons for being in a good system, as well as the talents and experience delivered to the business.

The Operating and Support systems will generally provide access to advice at the level of professional consultants in the fields of marketing, management, advertising, execution of the delivery of the product or service, customer support, etc. The cost of these types of consultants on the open market will often far exceed the value of the royalty fees that are remitted by the Franchisee that participates in a system that delivers these items from a position of experience. In fact, it’s the exact experience the Franchisee requires as opposed to open market advice.

Now here’s the test. If each of the four elements of a Franchise system is evaluated in terms of the percentage of contribution to the overall success of the business, then the royalty can be assessed in a proper light. Many people will say that each of the four elements contributes equally – or 25%, to the overall success. That means that the Brand, Operating System, and Support System provide 75% of the success formula. Therefore, as long as the royalty is less than 75%, it’s a good decision to participate in the system. That’s a little silly, but it emphasizes the point.

Most royalties range from 2% to 10% depending on the type of system, so as long as the Franchisor’s systems contribute 10% or more to the success of the business, it makes sense to participate, and remit the collection of royalties to the system.


I provide no-cost assistance to entrepreneurs nationwide, helping them identify franchise business opportunities that match their interests, backgrounds and financial means. I offer hundreds of business opportunities in a multitude of categories.

I am an affiliate of the world’s largest franchise network with more than 25 years experience helping entrepreneurs like you find and own their own businesses.

Contact us at 888 701-6413 or lee@myfpts.com
In the meantime, you can return to my website to continue browsing.

Best Regards,
Lee Thomas
Franchise Paths To Success

Comments are closed.