What Are Franchise Royalties? (2026 Updated)

Buying into a franchise can feel like a shortcut to a proven business model. You get the brand, the systems, and (usually) a lot of support.

But it also comes with ongoing costs - and one of the biggest is franchise royalties.

This guide explains what franchise royalties are, how they’re usually calculated, what they typically cover, and the legal and commercial issues you should check before you sign. It’s been refreshed for current conditions so you can feel confident you’re looking at the right risks and the right questions.

What Are Franchise Royalties?

Franchise royalties are ongoing payments you (as the franchisee) pay to the franchisor for the right to operate the franchised business.

You can think of royalties as part of the “ongoing cost of being in the system”. They are separate from the initial franchise fee (the upfront payment you often make when you first join the franchise network).

Royalties are usually set out in your franchise agreement, including:

• How much you must pay (fixed amount, percentage, or another method)
• When payments are due (weekly, fortnightly, monthly)
• How they’re calculated (for example, based on gross revenue)
• What happens if you’re late (interest, default notices, termination rights)
• Whether other payments apply (like marketing levies, technology fees, training fees)

It’s really important to understand that royalties aren’t automatically “bad” - they’re a normal part of franchising. The key is whether the royalty structure is commercially sustainable for your location, your margins, and your stage of growth.

Why Do Franchisors Charge Royalties?

From the franchisor’s perspective, royalties fund the ongoing operation and development of the franchise system.

For example, royalties may support:

• continuous improvement of operating systems and manuals
• centralised training and onboarding
• network-wide support (field managers, compliance, audits)
• product development and supplier negotiations
• brand management and reputation protection

That said, what royalties actually cover depends entirely on the franchise agreement (and often, your disclosure documents and operations manuals too). Don’t assume the royalty automatically includes everything you’ll need.

How Are Franchise Royalties Calculated?

There isn’t one standard method. Most franchise systems pick a royalty structure that fits their industry and how they want franchisees to behave (for example, incentivising sales volume or protecting profit margins).

Here are the most common approaches you’ll see in New Zealand.

1. Percentage Of Gross Sales (The Most Common Model)

Many franchisors charge royalties as a percentage of gross sales (sometimes called “gross revenue” or “turnover”).

Two quick points that catch people out:

• Gross usually means before expenses - so you pay royalties even if your costs are high that month.
• The agreement should define exactly what counts as “sales” (for example, whether GST is included, whether refunds are deducted, how vouchers or delivery app sales are treated).

This model is common in retail, food and beverage, and service franchises where the franchisor wants the royalty to scale with business activity.

2. Fixed Fee Royalties

Some franchises charge a flat amount each week or month, regardless of your revenue.

Fixed royalties can feel more predictable, but they can also be tough in the early stages when cash flow is tight. If revenue drops (seasonality, location issues, economic conditions), the royalty doesn’t drop with it.

If you’re looking at a fixed fee, it’s worth stress-testing it against:

• your break-even point
• expected ramp-up period
• realistic “bad month” scenarios

3. Tiered Or Sliding Scale Royalties

A tiered structure might charge different rates depending on your revenue - for example:

• 6% on the first $X of monthly turnover
• 4% on turnover above that threshold

This can be designed to make royalties fairer as the franchisee grows, but you need to check the maths and ensure the tiers are clearly defined (and that the franchisor can’t change them unilaterally without proper process).

4. Margin-Based Or Profit-Based Royalties (Less Common)

Occasionally you’ll see royalties based on profit or margin. This sounds fair in theory, but it can become complicated quickly, because it requires:

• clear accounting rules
• agreement on what counts as “profit”
• audit and reporting obligations

Where the contract is vague, profit-based royalties can become a dispute magnet. You’ll want very clear drafting and clean reporting processes.

What Do Franchise Royalties Usually Cover (And What They Don’t)?

This is where many franchisees feel surprised after signing: royalties are often described as “ongoing support fees”, but the agreement may not promise much support at all.

To avoid that, you’ll want to look for two things:

• What the franchisor must do (their obligations)
• What the franchisee must do (your obligations)

Common Inclusions

Royalties might include (or be linked to) things like:

• access to branding and IP (trade marks, logos, brand assets)
• access to the operating system and manuals
• training resources and refresher training
• helpdesk support or operations support
• system audits and quality controls
• software access (POS systems, booking platforms, reporting tools)

Even if you’re paying royalties, you should still check whether there are separate “technology fees” or “training fees” that sit on top of the royalty.

Common Exclusions (Costs That Often Sit On Top)

Some common extra costs franchisees pay in addition to royalties include:

• marketing levies (national brand fund contributions)
• local marketing spend you must fund yourself
• software licensing or upgrades
• required fit-out standards and refurbishments (sometimes at set intervals)
• supplier rebates (where the franchisor receives payments from suppliers - these need careful review)
• audit fees if your reporting is late or inconsistent

This is also why your financial modelling matters so much. Royalties aren’t just a legal concept - they directly shape whether your franchise can run profitably.

What Should You Check In A Franchise Agreement Before Accepting The Royalty Terms?

Royalties aren’t just about the headline percentage. The legal detail around how royalties are calculated, reported, and enforced is where things can get messy.

If you’re negotiating or reviewing a franchise agreement, here are the practical points to focus on.

How “Gross Sales” Is Defined

If royalties are calculated on gross sales, your agreement should clearly explain:

• whether sales are calculated including or excluding GST
• how refunds, chargebacks, discounts, and promotions are treated
• how vouchers, gift cards, loyalty credits, and prepaid packages are treated
• whether delivery app sales or third-party platform sales are included

A small definition can make a big difference to your monthly payments.

Reporting And Audit Rights

Most franchise systems require you to report sales through approved systems and allow the franchisor to audit your records.

This isn’t necessarily unreasonable - franchisors want consistency across the network - but you should check:

• how often reporting is required
• what systems you must use (and who pays for them)
• what happens if there’s a discrepancy
• whether the franchisor can charge audit costs back to you

It’s also worth checking how the franchise agreement interacts with your customer data and marketing practices - especially if you’ll be collecting customer contact details, running loyalty programs, or doing email marketing. This is where having the right Privacy Policy and compliant marketing processes matters.

Late Payment Consequences

Franchise agreements often contain strict default clauses. If you’re late paying royalties, you may face:

• interest on overdue amounts
• administration fees
• a formal breach notice
• termination rights if the breach isn’t remedied

This is one reason we usually recommend setting up clean internal processes from day one - good bookkeeping, clear reporting, and a cash buffer where possible.

Unilateral Changes To Royalties

Some franchise agreements allow the franchisor to change fees (including royalties or related charges) during the term.

If the agreement includes this, you’ll want to check:

• what limits apply (if any)
• whether the franchisor must act reasonably
• whether consultation is required
• whether you can terminate if fees change materially

If you’re not sure whether a “variation clause” is market-standard or overly one-sided, it’s worth getting advice before you commit.

Restraints, Territory, And What You’re Really Paying For

Royalties make more sense when you have meaningful value in return - like a protected territory, proven marketing support, and brand value that drives customers to you.

So it’s important to check:

• whether you have exclusive territory (and what “exclusive” actually means)
• whether the franchisor can sell online into your territory
• whether the franchisor can open competing sites nearby
• what restraint of trade applies when you exit

If you’re setting up your franchise through a company (which many franchisees do), make sure you also have your internal ownership arrangements sorted - like a Shareholders Agreement if you’re going in with a co-founder, and a Company Constitution if you want clear rules around decision-making and share transfers.

Are Franchise Royalties Tax Deductible In New Zealand?

This is a common question, and the practical answer is: royalties are often a deductible business expense, because they’re an ongoing cost of operating the business.

But tax deductibility depends on your specific situation, the nature of the payment, and how the franchise arrangement is structured. For example:

• ongoing royalties may be treated differently from one-off fees
• payments bundled with software, training, or equipment may need to be separated
• GST treatment can depend on how the franchisor invoices you and where parties are located

Your accountant is usually the best person to confirm the tax treatment for your exact arrangement. From a legal perspective, the key is to make sure the agreement is clear on what you’re paying and why - vague fee descriptions can create avoidable confusion later.

Common Royalty Pitfalls (And How To Avoid Them)

Most royalty problems aren’t about the concept of royalties - they come from misunderstandings, vague drafting, or a mismatch between the franchise model and your real-world costs.

Here are some pitfalls we see regularly.

Underestimating Total Ongoing Fees

Royalties are often just one part of the ongoing cost stack.

Before you sign, make a list of all ongoing payments, including:

• royalties
• marketing levies
• mandatory software subscriptions
• required training refreshers
• audit fees (if applicable)
• other “system fees” or “support fees”

This is one of those “measure twice, cut once” moments - it’s much easier to spot a bad deal before you sign than to unwind it later.

Paying Royalties Even When Your Business Is Struggling

If your royalty is based on gross sales, you pay it even when:

• your expenses spike (rent increases, wage increases, supplier price rises)
• you need to discount heavily to compete
• your location has seasonal downturns

This doesn’t mean a gross-sales royalty is unfair - it just means you should stress-test your profit margins realistically and make sure there’s enough buffer.

Not Understanding Termination And Exit Costs

If the relationship ends early (whether you want to exit or the franchisor terminates), you may still face:

• outstanding royalties and fees
• interest and enforcement costs
• restraint obligations
• de-branding requirements
• asset sale or transfer requirements

And if you plan to sell your franchise business later, you’ll want to understand what rights and approvals the franchisor has over the sale process and buyer selection. This is where a proper Business Sale Agreement (and the franchise documentation) need to line up cleanly.

Operating Without Solid Contracts And Policies Around You

Even though you’re part of a franchise system, you still run your own business day-to-day. That means you’ll likely need your own:

• staff arrangements and onboarding
• workplace policies
• customer-facing terms (depending on your industry)

For example, if you’re hiring employees, it’s important to have a proper Employment Contract in place, even if the franchisor provides a template - because your business, your role descriptions, and your risk profile might not match a generic document.

Key Takeaways

• Franchise royalties are ongoing payments you make to the franchisor for operating under the franchise system, and they’re usually separate from the upfront franchise fee.
• Royalties are commonly calculated as a percentage of gross sales, a fixed weekly/monthly amount, or a tiered structure, and the details of the calculation really matter.
• Don’t assume royalties cover everything - many franchisees also pay marketing levies, technology fees, training fees, and other system costs on top.
• Check the definitions and mechanics in the franchise agreement, especially how “gross sales” is defined, what reporting is required, and what audit rights the franchisor has.
• Look closely at default and variation clauses, including what happens if you’re late paying royalties and whether the franchisor can change fees during the term.
• Model the real-world impact of royalties on your margins and cash flow, because you may still owe royalties even during slow periods or high-cost months.
• Get the legal foundations right before signing - a tailored contract review can help you understand the commercial risk, spot one-sided terms, and negotiate improvements where possible.

If you’d like help reviewing a franchise agreement (including the royalty structure and other ongoing fees), reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.