Restaurants, hotels and travel
Franchise royalty
The ongoing fee a franchisee pays the brand, usually a percentage of sales.
Last reviewedWhat does Franchise royalty mean?
A franchise royalty is the regular fee a franchisee pays the franchisor (the brand owner) for using its brand, recipes and systems, usually a percentage of the franchisee's sales. It often comes with a separate contribution to a marketing fund and an upfront franchise fee for each new outlet. Example: a franchisee with sales of 1.2 million a year pays a 5 percent royalty (60,000) and a 4 percent marketing contribution (48,000). Because royalties are based on sales, not profit, the franchisor earns even when franchisees struggle, which makes franchising an asset-light, high-margin model for the brand.
Where does it come up in case interview prep?
- Business models: who pays, and for whatLesson in How industries work: the toolkit
- How restaurants and food service make moneyLesson in Restaurants and food service
- Restaurant unit economics: turns, delivery, and franchisingLesson in Restaurants and food service
- Restaurant players, trends, and how to crack the casesLesson in Restaurants and food service
- How sports and live events make money, and who does whatLesson in Sports and live events
Related terms
- Master franchiseThe right to develop a brand across a whole country or region, including signing sub-franchisees.
- Asset-light modelGrowing a business without owning the heavy assets, by franchising, managing or leasing them.
- Average unit volume (AUV)Average yearly sales per restaurant or store.
- Prime costFood and drink cost plus labour cost, the two biggest restaurant costs.
- Table turnsHow many times each table is used by a new group in a meal period or day.
- CoverOne guest served a meal: the unit restaurants count.
- Same-store sales (comparable sales)The US name for like-for-like sales: growth at restaurants or stores open in both periods.
- Delivery aggregatorAn app that lists many restaurants and delivers their food for a commission.