What's the norm for franchise royalty/residual payment percentages?

I'm thinking about buying a franchise location, but want to be sure the costs are appropriate.

Jeff Elgin answered October 1, 2009|

Comment

The norm for franchise royalty payments differs depending on what type of business the franchise is engaged in and what the typical profit margins in the business might be.

As a general rule of thumb, most business format franchises have a royalty percentage somewhere between 4 and 6 percent of gross sales--though I have seen a range from 0 to 25 percent with different franchises.

Royalty rates that are higher or lower than the norm do not necessarily imply a better or worse deal for the franchisee. Rather than focusing on what percentage the franchise company receives, it is far wiser to focus on what percentage the average franchisee gets.

If the average profit percentage to the franchisee, after paying all expenses including royalties, produces a net profit sufficient to meet your goals in terms of return on investment then it is a good franchise for you. If not, it is not a good franchise.

Either way, the royalty percentage is just one of many factors that add up to your total expenses and you need to focus on what you get rather than what someone else gets.

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Jeff Elgin

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.