Franchise Fee, Royalty Fee, License and Marketing Fee – Franchise Agreement Terminology

To negotiate a franchise agreement, the potential franchisee needs to fully understand the terminology used in the franchising industry. Often, new franchisees misunderstand the terms ‘Franchise Fee’, ‘Royalty Fee’, ‘License’ and ‘Marketing Fee’. Once understood, the potential franchisee can better negotiate the agreement and furthermore save a significant amount of money over time. This article is designed to teach the new entrepreneur about these terms and how the fees or rates are structured.

It is no secret; I am here to help the potential franchisee in their quest to be successful business entrepreneur. The franchisor has invested tens of thousands of dollars in legal and licensing fees to create a franchise agreement. The franchisee doesn’t have those types of dollars to review and negotiate a fair business contract. To save the entrepreneur time and money, I have written a series of articles about the franchise agreement.  Read the series and then find an attorney familiar with franchise law and negotiate with authority in settling with the franchisor. THERE IS NO SUBSTITUTE FOR GOOD LEGAL COUNSEL. FIND A GOOD ATTORNEY THAT UNDERSTANDS FRANCHISE LAW.

The following sections describe and illustrate the four key terms in a franchise agreement.

The Franchise Fee

When a potential franchisee wants to enter into an agreement with the franchisor, the franchisor charges a Franchise Fee. This is typically a one-time upfront fee to begin the process of the relationship. Often the franchisor is trying to recoup the initial cost outlays to establish the franchise system. For the franchisee, this fee is an expensive outlay that will take years to recover. Often this upfront fee is in the tens of thousands of dollars. For example, the HAAGEN-DAZS® SHOP franchise system requires a $30,000 franchise fee when signing the agreement. Think about this for a moment. This is ice cream. How long will it take to sell 300,000 cups of ice cream to repay this amount at 10 cents per cup? It isn’t like every dollar of the sale is pure profit. The franchisee still has to pay for the food, the supplies, labor, rent, insurance, utilities etc. before having any funds left over to begin the recouping of the initial franchise fee.

The following are examples of franchise fees charged by different systems:

7-Eleven                       $31,000
McDonald’s                    45,000
Christmas Décor             13,000
Jackson Hewitt               25,000
AmeriSpec                      25,000
Merry Maids                   25,000
Roto-Rooter                    10,000


This is a monthly fee usually charged on the revenue stream to use the franchise name or trademark. The most common amount is between 5 and 7% of the sales. Most franchisors require the royalties’ payment each month. Some organizations require a prepayment monthly based on the expected sales for the upcoming month. There are other methods for the royalty including a monthly flat rate or a flat rate plus a percentage of the sales. For the franchisee, this can be a significant portion as a ratio of the profit (margin) before the royalty fee. In more than three fourths (75%) of all franchise agreements, the royalty exceeds 50% of the total profit before the royalty fee. Franchisees should realize that their services is really doing not much more than supporting the franchisor through royalties. Remember the risk reward concept of business. Read more about risk in the following article: How Much is a Fair Profit – Risk.

In my accounting experience, the most common outcome is that the royalty is more than the profit leaving the franchisee with nothing more than heartache of owning a business.

The following are examples of royalty rates charged by popular franchise systems:

Jackson Hewitt                                      15%
AmeriSpec                                              7%
Merry Maids                                           6%
Subway                                                   8%

License Fee

A license fee is similar to the franchise fee except it is charged to cover the cost associated with the brand of products sold or the technology used. In effect, the franchisor is merely a broker to a patent or trademark. Therefore the franchisor pays for the use of that brand, trademark, or patent and he passes this cost (and sometimes some profit off the use of the license) onto the franchisee by charging a license fee.

The license fee is typically an annual fee or some flat rate dollar amount. In many relationships, the franchisee must buy supplies or product from the franchisor and the license fee is a component of the inventory cost. A good example is the Subway system. The franchisee must purchase all meats, condiments, and supplies from Subway and thus the license element is built into the costs associated with these products.

Many franchise agreements have the license costs built into the royalty fee. However, there may be situations where this term will pop up and thus the franchisee needs to understand what it applies to in the agreement.

Marketing Fee

This is where it really gets overwhelming. Almost every franchise agreement requires the franchisee to conduct marketing in spreading the value of the brand or franchise name. Often a marketing fee is included because the franchisor manages the marketing and advertising for the franchises. In many situations the fee is broken down into two elements. The first is the national or regional campaign fee and the second is the local market fee. As an example, Dairy Queen has a percentage of sales associated with a national campaign to advocate its name and products. In addition, a local market campaign is conducted within the television zone. Those stores within that zone must contribute an advertising percentage of sales to this campaign. The national organization provides the commercial material and the local TV station adds in the list of local stores for patrons to visit.

This fee structure ranges from 2 to 5% depending on the nature of the industry and the number of franchisees involved. In some agreements, a flat monthly fee exists along with a percentage of sales.

The Big Picture

For the franchisee, the key is to understand the totality of the situation. In my experience, the cumulative sum of all this overwhelms the franchisee and in effect, he gets nickel and dimmed out of business. He ends up becoming an indentured servant to the franchisor. The primary reasons for the relationship are as follows:

  1.  Higher income attributable to the franchise name, brand, logo, or trademark
  2. Reduction in the failure rate of business by using or exercising a known business plan and operational procedure i.e. a reduced failure rate

The cumulative effect of the Franchise Fee, the Licensing, the Royalty Percentage and the Marketing Costs can easily exceed 20% of sales. In many situations, the total effect exceeds 30% of sales. If you are interested in a franchise relationship, make sure you understand the four above terms and not only what they mean but their impact on sales and ultimately your personal income. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount: