What does the term ‘royalties’ relate to in the franchise agreement?

A franchisee will have to pay a number of fees to the franchisor throughout the term of the franchise agreement. These payments are sometimes generically referred to as ‘royalties’ and can include periodic ongoing fees and advertising fees.  However, the term royalty is often more commonly used to refer to the ongoing periodic fee that is payable by the franchisee to the franchisor for the continuing use of the franchisor’s trademarks and know-how, to cover the cost of the franchisor’s updating and development of the franchise concept, and for some ongoing assistance with the franchise system (although some assistance from the franchisor will often be subject to a further fee). This royalty payment may also be referred to as a ‘service fee’ or ‘management fee’ in some franchise agreements.  The amount of any royalty payment is usually calculated as a percentage of the franchisee’s gross sales and, in most circumstances, will be somewhere between two and 10 per cent. However, a franchisee must bear in mind that the royalty may not be the only payments it has to make to the franchisor. For example, an initial fee or deposit may be payable on or before signing a franchise agreement and it is common for a separate advertising fee to be payable, which again is usually calculated as a percentage of gross sales.