What your royalty is actually costing you each month

Here's a number worth sitting with before you sign anything: a 6% royalty on a £600,000 turnover unit costs £36,000 a year. Every year. Whether you had a good month or a terrible one. Whether you're profitable or not.

That's not a criticism of royalties - they're how franchising works, and most of the time the brand support you get in return is worth it. But it is a number that a surprising number of prospective franchisees haven't actually run before they commit to a five-year agreement. We've sat across from a lot of people at that stage, and the royalty calculation is one of the things that lands differently when you write it out properly.

So let's do exactly that.

Royalties are calculated on what you take, not what you keep

This is the bit that catches people out. Your royalty is a percentage of your gross sales - your turnover - not your profit. That distinction matters enormously in hospitality, where net margins typically run between 10% and 20% on a good day.

Take a unit turning over £500,000 a year with a 6% royalty. That's £30,000 going to the franchisor before you've paid a penny of food costs, wages, rent, or energy. In a month where sales are slower - say January, when hospitality always takes a hit - the royalty obligation doesn't slow down with it. You still owe the percentage of whatever you took.

Now add the marketing levy, which is almost always separate from the royalty. Most franchise agreements include a mandatory contribution to the brand's national marketing fund, typically 1-2% of turnover on top of the royalty. On that same £500,000 unit, you're now looking at £35,000-£40,000 a year in combined fees before you've opened the door.

What it looks like across a year

Here's a simple worked example. These aren't hypothetical numbers - they're drawn from the unit economics of real hospitality franchise models.

That's £45,000 before food costs (typically 25-35% of revenue), labour (30-35%), rent, rates, energy, and everything else. When you stack the full cost picture, the difference between an 18% net margin and a 10% net margin can be the difference between a business that works and one that doesn't. The royalty is a fixed line in that model. Everything else has to fit around it.

The month it hurts most

The royalty obligation doesn't have a bad month clause. If your sales drop in February - perhaps your footfall is quieter, perhaps a local competitor has opened - you still owe the percentage. If you're in a loss-making month, you're paying the royalty out of reserves.

This is why we always build a stress-test into the unit economics conversation: what does this unit look like in its worst month? What happens to the P&L if sales drop 20% for a quarter? The royalty line doesn't move. Does everything else still work?

Some prospective franchisees look at the headline royalty rate - 5%, 6%, 8% - and think it sounds manageable. And it is manageable, when the unit is performing well. The question worth asking is: what does that rate mean when the unit isn't?

Mandatory purchasing: the hidden royalty

While we're on the subject of fixed costs that don't move with your performance, it's worth mentioning tied supply chains. Many franchise agreements - particularly in QSR and coffee - require you to purchase your core ingredients and supplies through the franchisor's approved suppliers.

There's a legitimate reason for this: brand consistency, negotiated scale pricing, quality control. But the prices you pay through a tied supply arrangement are often above what you'd pay on the open market. That gap is effectively an additional cost of the franchise - one that doesn't show up in the royalty rate but absolutely shows up in your food cost percentage.

Before you sign, it's worth asking specifically: what is the approved supplier list, what are the prices, and how do they compare to market alternatives? Some franchisors are genuinely transparent about this. Others are not.

What to do before you sign

None of this is a reason not to franchise. A well-run franchise in a strong brand with solid unit economics is still a compelling business opportunity - the royalty is the cost of access to that system, and for many operators it's a cost well worth paying.

But you should know the number before you commit to it. Specifically:

• Calculate your royalty at three turnover levels: your target, your break-even, and 20% below break-even
• Add the marketing levy separately - they're almost never bundled
• Ask about mandatory purchasing arrangements and get specific prices, not assurances
• Run the combined fees line (royalty + marketing levy) as a percentage of your projected net margin, not your turnover - that's the number that tells you what the franchise is actually costing you

The best franchisors will actively help you do this modelling. They'll have P&L data from existing units, they'll walk you through the full fee structure without being asked, and they'll want you to go in clear-eyed - because a franchisee who understood the numbers before they signed is one who planned for them. When a brand is genuinely confident in its unit economics, it has nothing to hide. The transparency is part of the pitch.

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That's not universally true. Some brands - particularly those relying on portal listings, high-volume broker introductions, and glossy discovery days - sell the opportunity rather than the economics. The royalty rate gets buried in the excitement of the brand story. The marketing levy doesn't come up until you're reading the agreement. The mandatory purchasing arrangements get described as a benefit rather than a cost. It's not always deliberate, but the effect is the same: you sign having modelled the headline, not the reality.

The risk in going in blind isn't just financial - it's that by the time you've realised the numbers don't work the way you expected, you're locked into a five-year agreement with no straightforward exit. That's the situation we've seen too many times, and it's almost always avoidable.

Our process at Franchise Foundry is built around the unit economics, not just the brand's story or the discovery day - and before you are introduced to anyone from the franchise brand, when it is harder to ask the uncomfortable questions. We only introduce candidates to brands whose numbers we've already interrogated, and we only work with brands that are willing to be interrogated. The ones that aren't don't make it into our network.