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When running a franchise, a franchisee will operate one of the franchisor’s branches, while a portion of those profits is paid to the franchisor as compensation for the ongoing support and brand usage. In 2025, this model continues to evolve with increased transparency and clearer guidelines for both parties.
These payments are known as franchise royalties.
In other words, the franchisee pays the franchisor for the continued use of their business model, proprietary systems, and branding assets.
Franchisees will typically make an initial, one-off payment to the franchisor for setting up the franchise, and then they move on to ongoing royalty payments for running the branch.
Royalty fees are ongoing charges that enable the franchisor to maintain brand standards, provide training and support, and fund marketing initiatives. The most important aspects to understand about franchise royalties are:
- The nature of franchise royalties
- How they differ from other types of royalty payments
- The distinction between the initial franchise fee and ongoing royalty payments
- The purpose of royalty payments in furthering the franchise network
- The typical payment percentage and structure for 2025
It is worth noting that franchise royalties are not a compulsory element in every Franchise Agreement. Some business owners may decide to adopt a fixed monthly fee instead, which is becoming more common in innovative franchise models. Learn more about alternative fee structures on our Business Set Up page.
Regardless of whether you are a franchisor or a franchisee, understanding royalty payments and their strategic role in franchise relationships is key. Read on to learn more about how franchise royalties work and how updated practices in 2025 are shaping the industry.
What Are Royalties?
Generally speaking, royalties are payments made for the use of an asset. One party pays another a fee in exchange for utilising something they own, whether that be intellectual property, a creative work, or a business system.
Many industries, from music to publishing and beyond, rely on royalties as a standard payment method.
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Example For instance, imagine you have composed an original piece of music, and a local theatre wishes to use it as background music for their upcoming show. An agreement is reached for the theatre to pay royalties each time your music is performed, ensuring you benefit continuously from its use. |
Royalties are a common method of payment in the creative industries, where artists, writers, and composers earn ongoing income from the reuse of their work. Updated data in 2025 shows that many creators now benefit from digital tracking technologies that ensure accurate royalty assessments.
There is no universal cap or minimum for the amount payable in royalties. The actual figures depend on the parties involved, the scope of use, and the commercial value of the asset. Clear stipulation of these details in contractual negotiations is essential.
This should be well defined in any agreement between the parties to avoid disputes later on.
Do Franchises Pay Royalties?
Yes, franchises typically include agreements where the franchisee pays a royalty fee to the franchisor on a regular basis, usually monthly.
Although there is no statutory requirement dictating royalty payments, many businesses opt to include this as a method of funding continued support from the head office. Increasingly in 2025, franchisors are adopting transparent fee structures to reflect current market conditions.
A franchise royalty fee helps the head office cover expenses related to expansion, support, and the maintenance of brand quality, thereby strengthening the franchise network. For additional insights on business expenses and funding strategies, check out our Getting Finance services.
What Is A Franchise Royalty?
Once a franchisor and franchisee finalise their agreement, and the franchisee begins operating under the established brand, they start to generate profits. A pre-agreed percentage of these profits is then paid to the franchisor as a royalty fee.
The percentage typically ranges from 5% to 6%, though in some cases it can be as high as 15%, depending on the franchise system and the value of the support provided by the franchisor. Updated market research in 2025 supports that the majority of well-established franchises remain within the 5-8% range.
Effectively, franchise royalty payments operate similarly to other royalties – the franchisee uses the franchisor’s business assets, such as the business model, intellectual property, products, and operational systems, and pays a percentage of their earnings over the course of the agreement.
However, the contractual nature of a Franchise Agreement means that these payments are fixed as long as the relationship continues, unlike regular royalty payments which cease once the asset is no longer in use.
What Is The Difference Between Franchise Royalties and Franchise Fees?
Franchise fees are usually a one-off payment made when you first establish a franchise. This initial fee covers costs associated with launching the franchise, including legal expenses, access to intellectual property, and initial training. For example, you might use our guidance on Legal Documents for Business as part of the start-up process.
- Lease Agreement
- Intellectual Property (possibly requiring an IP Licence)
- Legal expenses
Franchise royalties, by contrast, are an ongoing, percentage-based payment that is calculated from the monthly profits of the franchise. This recurring fee is intended to cover continuous support, marketing, training, and administrative costs managed by the franchisor.
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Example Erin has invested in a clothing boutique franchise from her franchisor, Claire. According to their Franchise Agreement, Erin is required to pay Claire 10% of the monthly profits as a franchise royalty fee. Last month, the boutique earned NZD 10,000 in profit, meaning Erin paid NZD 1,000 in royalties. |
You might ask, “If a franchisor already receives an initial franchise fee, why are ongoing royalty fees necessary?”
The ongoing royalty fees are designed to serve as both a profit-sharing mechanism and as an incentive for the franchisor to continually invest in the brand – funds that are reinvested in training, marketing, and overall franchise support, which ultimately benefits all parties involved.
What Does A Franchise Royalty Payment Cover?
A typical franchise royalty payment goes towards the continued support provided by the franchisor to its franchise network. In 2025, the scope of this support has expanded to include digital transformation services and modernised marketing strategies. These costs can include:
- Marketing costs (often managed through a Marketing Fund)
- Training and refresher resources
- Equipment and technological upgrades that have been provided
- Ongoing oversight and support from the head office
- Administrative expenses and other operational costs
Essentially, the franchisor manages a range of operational, administrative, and strategic tasks that allow the franchisee to focus on running the business. The royalties compensate the franchisor for these efforts.
How Do We Calculate Franchise Royalties?
The royalty percentage you pay will depend on the scale and strength of the franchise. Larger, internationally recognised brands may charge higher percentages, while smaller franchises might offer a more moderate rate. It’s always advisable to discuss these figures with a financial expert to ensure the fees are sustainable and reflective of both the risks and potential rewards. Our Small Business Lawyers can also offer guidance on negotiating fair terms.
Why Do Franchise Owners Pay Royalties?
Royalties enable franchisors to earn ongoing revenue from their business systems while funding the support they provide to their franchise networks. This model ensures that as the franchise grows, both parties share in the successes, and resources are consistently reinvested to support expansion.
The fee structure must be balanced so the franchisee can sustain operations and earn a profit, while also providing the franchisor with sufficient capital to drive future growth and innovation. For more detailed insights on business expansion and legal requirements, please visit our Business Set Up section.
We always recommend that both franchisors and franchisees consult with a legal expert to review their contracts. In 2025, it is more important than ever to ensure that your franchising arrangements comply with the latest regulations, including updates from the Franchising Association of New Zealand’s Code of Practice. For assistance with contractual matters, see our resource on Why A Lawyer Should Review Your Contract.
What Is The Difference Between Regular Royalties & Franchise Royalties?
Regular royalties are typically paid for the use of an asset, and payment ceases once the asset is no longer utilised. By contrast, a Franchise Agreement is a binding contract. As a result, even if a franchisee might wish to ‘discontinue’ using the franchise system, they remain obligated to continue paying the agreed-upon franchise royalties until the contractual period is formally concluded or renegotiated.
Let’s examine this difference with an example.
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Example Allison is a wildlife photographer and Helen runs a well-respected nature blog. Helen requests permission to use one of Allison’s photos on her website banner. Rather than selling the rights, Allison permits the use under a Licence Agreement, whereby Helen pays monthly royalties based on her blog earnings. When Helen later decides to use another photographer’s image, the Licence Agreement with Allison is terminated and royalty payments cease. This contrasts with a franchise setting, where contractual commitments remain in force. |
In many scenarios, royalty payments end as soon as the asset is no longer being used. However, with a Franchise Agreement, the relationship is governed by more complex contractual obligations, and consequently, the payments continue as outlined in the contract.
Key Takeaways
Franchising a business involves several costs, and royalties represent one of the main recurring fees. Both franchisors and franchisees should have a thorough understanding of how these fees work to prevent complications down the line.
All details regarding franchise royalties should be clearly defined in your Franchise Agreement from the outset. By negotiating these matters early on and ensuring transparency, you can better manage your franchise’s budget and safeguard your investments. For further reading, you may also want to explore our guides on Getting Started with Your Legals and Business Structure.
Additionally, be sure to stay abreast of the latest legal and industry updates for 2025, as evolving market conditions and regulatory changes can have a significant impact on franchising agreements. Our Legal Tips section is an excellent resource for continuous updates.
We have numerous resources to guide you through every stage of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
If you would like a consultation regarding franchises and royalty payments, you can reach our franchise lawyers at 0800 002 184 or [email protected] for a free, no-obligations chat.
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