Franchise royalty definition

Franchise royalty is a sum paid to the franchisor. It typically is the percentage of sales (usually the gross) that the franchisees pay to the franchisor company on a regular basis. It pays for the ongoing rights to participate in the franchise and may cover specified advertising and other support activity by the franchisor.

Royalty income is usually the real profit center for a franchisor because of the leveraging ability. For example, imagine a franchise company owns 100 franchised outlets, and each outlet does $30,000 in monthly sales and pays a 5% royalty to the franchise company. That means $1,500 is paid by each franchisee, resulting in $150,000 paid to the franchisor each month (or 100 outlets x $1,500).