Royalty Fees: Why They’re Necessary and What You Receive in Return

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Franchise royalty fees are part of the overall franchise cost, and they help support your franchise location. Learn more about franchise royalties, how they work, what they cost, and why they are an essential part of the franchise model.

How Much Is the Franchise Royalty Fee?

The royalty fee is one of the components of the overall restaurant franchise cost. This fee is typically calculated as a percentage of your gross sales, and it’s paid regularly to the franchisor. The specific percentage can vary significantly from one franchise opportunity to another.

The exact percentage of the royalty fee varies based on many factors, including the reputation and success of the franchisor, the type of dining concept you’re joining, and the level of support and resources provided by the franchisor. On average, royalty fees tend to range from 4% to 12% of gross sales, but they can go higher or lower depending on the circumstances.

What’s the Purpose of the Royalty Fee?

The answer to this question lies in the benefits you receive as a franchisee. When you invest in a restaurant franchise, you’re not just buying the rights to use a recognized brand name and system, you’re also gaining access to a wealth of resources and support.

Franchisors provide a range of valuable services to help you succeed, including marketing support, training programs, access to suppliers, ongoing research and development, and assistance with site selection and design. The royalty fee helps fund these crucial services and allows the franchisor to maintain and enhance the brand’s overall strength and profitability.

Think of it as a partnership – you pay a percentage of your sales to the franchisor, and in return, you benefit from their experience, brand recognition, and the collective strength of the entire franchise network.

Let’s break it down further to address what these fees pay for:

  • Brand equity: By paying this fee, you’re essentially investing in the brand’s reputation and recognition. This includes access to established trademarks, logos, and marketing materials that help you attract customers.
  • Ongoing support: Franchisors often provide continuous support through training programs, operational guidance, marketing assistance, and technological upgrades. The royalty payment helps fund these resources, ensuring you receive ongoing assistance to run your business successfully.
  • Research and development: Successful franchises are constantly evolving to stay ahead of the competition. Your royalty contributions help pay for research and development efforts aimed at improving products, services, and operational efficiency.
  • Marketing and advertising: Building and maintaining brand awareness requires substantial investment in marketing and advertising initiatives. The royalty fee often goes toward funding national or regional marketing campaigns that benefit all franchisees by driving customer traffic to their locations.

How Do Royalty Fees Vary?

As mentioned earlier, these can vary significantly among different franchises. Here are a few factors that can influence the variation:

  • Brand recognition: Established and well-known brands may charge higher fees due to the value they bring to the table. Conversely, less recognized franchises might offer lower fees to attract new investors.
  • Industry: Industries with more intensive oversight and regulation may come with higher royalty fees.
  • Support and resources: Franchisors that provide more extensive training, marketing, and operational support may charge bigger fees to cover these services.

Breaking It Down

This fee is usually a percentage of your gross or net sales, meaning the total revenue generated by your franchise before deducting any expenses. This straightforward formula ensures your royalty payments align with your business’s performance. However, it’s essential to carefully review the royalty fees as described in the Franchise Disclosure Document (FDD) to understand how your budget might be affected. For instance, if your franchise location generates $500,000 in sales in a year, you would pay $30,000 (6% of $500,000) annually to the franchisor. The royalty fee is usually paid weekly.
This minor fee contributes to the ongoing support and resources you receive from the franchisor, helping you maintain and grow your business over time. Teriyaki Madness’s royalty fee, as listed in the current FDD, is 6%* of sales, excluding sales tax.

Other Types of Franchise Fees

While the royalty fee is a significant component of the overall cost of franchising, it’s essential to distinguish it from the other fees you may encounter when evaluating your potential investment:

  • Initial franchise fee: This is the upfront fee you pay to secure the rights to open a franchise location. It’s a one-time payment and is separate from any ongoing royalties.
  • Advertising fee: Some franchisors require franchisees to contribute to a separate advertising or marketing fund. This advertising fee is specifically earmarked for local advertising campaigns or promotions.
  • Technology fee: Franchises that rely heavily on technology may charge a separate fee to make sure software and any proprietary technologies stay updated.

These different fees are all a fundamental part of what makes the franchising model work. They vary depending on several factors, but they’re all elements of a worthwhile investment that allows you to tap into an established brand’s strength and resources. By paying a percentage of your gross sales in royalties, you’re not just buying a name – you’re gaining a partner on your journey to success in the franchising world. So, as you explore franchise opportunities, be sure to carefully consider the royalty fee and what you’ll receive in return. It’s a partnership that can pave the way for a prosperous future.

Why Choose Teriyaki Madness

Teriyaki Madness is a growing franchise that blends the best of what QSR and fast casual restaurants have to offer. The royalty and other fees help provide you with all the support you need to run your business. The estimated initial investment to buy a Teriyaki Madness location ranges between $350,00 and $976,860*. Teriyaki Madness provides comprehensive training and ongoing marketing and operational support, as well as the backing of a much beloved and growing name in fast casual dining.

To learn more about Teriyaki Madness’s full-service franchise support by downloading the franchise report.
*Refer to Teriyaki Madness 2024 FDD

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