What Are Franchising Royalties? (2026 Updated)

Franchising can be an exciting way to grow a business (if you’re a franchisor) or step into a proven model (if you’re a franchisee). But one of the first questions people ask is: what are franchising royalties, and what do you actually get for them?

Royalties are a core part of most franchise systems, and they can make or break your cashflow if you don’t understand them from day one. This guide is updated for current New Zealand commercial expectations, including the reality that many franchise systems now rely heavily on digital marketing, platform fees, and tech-enabled support.

Below, we’ll break down what franchising royalties are, how they’re calculated, what they typically cover, the legal issues to watch for, and the practical steps to take before you sign anything.

What Are Franchising Royalties (And Why Do Franchise Systems Charge Them)?

In simple terms, franchising royalties are ongoing fees a franchisee pays to the franchisor for the right to operate under the franchise system.

Most people understand the idea of a one-off “franchise fee” (often paid upfront when you join). Royalties are different: they’re usually ongoing and paid weekly, fortnightly, or monthly throughout the franchise term.

Royalties exist because the franchisor isn’t simply “selling you a business” and walking away. A genuine franchise system is designed to provide continued value, such as:

• Use of the brand (trade marks, reputation, goodwill)
• Access to the operating system and know-how (manuals, processes, training)
• Ongoing support (field managers, coaching, compliance checks)
• Technology tools (POS systems, booking platforms, CRM tools)
• Centralised marketing (sometimes, depending on how the franchise is structured)
• Supplier and purchasing arrangements

From a commercial perspective, royalties are also how franchisors fund the infrastructure that keeps the system running and consistent across all locations.

That said, not all royalty models are equal, and “standard” terms can still be risky if they don’t match how your particular site will trade.

How Are Franchise Royalties Calculated In New Zealand?

There’s no single royalty formula that applies to every franchise in New Zealand. What matters is what your franchise agreement says and how the fee is defined.

Here are the most common ways franchising royalties are calculated.

1. Percentage Of Gross Sales (Turnover)

This is one of the most common structures. The franchisee pays a set percentage of “gross sales” (for example, 6%–10%).

Key point: “Gross sales” sounds straightforward, but it often isn’t. A well-drafted franchise agreement should spell out exactly what counts, such as:

• Cash and EFTPOS sales
• Online orders and app orders
• Delivery platform sales (even if the platform takes commission)
• Gift cards and vouchers (when sold vs when redeemed)
• Refunds, returns, chargebacks (and how they’re treated)

If you’re reviewing a franchise deal, it’s worth checking whether the royalty applies to sales before or after certain deductions (and whether any deductions are permitted at all).

2. Fixed Fee (Flat Weekly Or Monthly Royalty)

Some franchise systems charge a fixed royalty (for example, $400 per week), regardless of how much you sell.

This can be attractive if your site is expected to grow quickly, because the fee won’t rise with turnover. But it can also be painful in slow periods, because you’ll still owe the same amount even if your revenue drops.

3. Tiered Royalties

A tiered structure can work like:

• 8% on the first $10,000 per week
• 6% on sales above $10,000 per week

This model is sometimes used to balance franchisor revenue with franchisee scalability.

4. Hybrid Royalties (Fixed + Percentage)

You might see a combination of a base fee plus a smaller percentage. This can give the franchisor predictable income while still tying part of the fee to performance.

5. Minimum Royalties

Some franchise agreements include minimum payments, meaning that even if a percentage calculation is low, you still pay a minimum amount.

Minimums can be commercially reasonable in some systems, but they should be understood as a real risk item for franchisees-especially in seasonal industries or early-stage sites.

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

A common frustration for franchisees is paying royalties without feeling like they’re getting value back. This is why clarity matters: royalties are not always “all-inclusive”.

Depending on the franchise network, royalties may cover some of the following.

Common Inclusions

• Brand licence: permission to trade under the brand and use brand assets
• System access: operating manuals, product/service standards, recipes, scripts, training materials
• Operational support: coaching, performance reviews, inspections, troubleshooting
• Technology: required software platforms, reporting systems, online ordering systems (sometimes these are charged separately)
• Network development: ongoing improvements to the system and supplier negotiations

Common Exclusions (Or Separate Fees)

It’s also very common for franchise systems to charge separate fees on top of royalties, such as:

• Marketing / advertising levies (often separate from the royalty)
• Software licence fees (POS, CRM, booking tools, cybersecurity tools)
• Training fees for new staff or refresher programmes
• Audit or compliance costs if you’re in breach or require extra support
• Supplier rebates retained by the franchisor (sometimes disclosed, sometimes not clearly)

This is why it’s important to read the agreement as a whole and map your real weekly cost base. It’s not just “royalty rate”; it’s the total ongoing fees plus required spend.

If the franchise system also requires you to hire staff, your employment setup needs to be right from the start, including having a compliant Employment Contract in place for employees (and correct treatment of contractors vs employees).

What Should The Franchise Agreement Say About Royalties?

Royalties are commercial, but they’re also legal. The franchise agreement should be clear enough that you can:

• calculate what you owe
• predict your cashflow
• understand the consequences if you pay late or dispute the amount
• see what rights the franchisor has to change the fee (if any)

When we review franchise agreements, these are some of the clauses that usually matter the most for royalties.

How “Gross Sales” Or “Revenue” Is Defined

A small drafting difference can change your royalty bill significantly. For example, does “gross sales” include GST? Does it include delivery platform sales before the platform deducts commission?

Payment Timing And Method

Agreements often allow the franchisor to directly debit royalties from a nominated account.

You should also check:

• when the payment is due (e.g. weekly on Monday for the previous week)
• what reports you must provide (POS extracts, sales summaries)
• what happens if your reporting is late or incorrect

Audit Rights And Record Keeping

Most franchise agreements give the franchisor audit rights. That can be reasonable, but you want it framed properly, including:

• reasonable notice (except in suspected fraud cases)
• limits on frequency
• who pays for audits (especially if a discrepancy is found)

Because audits often involve customer and staff information, franchisees also need to handle data properly under the Privacy Act 2020, including having a fit-for-purpose Privacy Policy if you collect personal information online or through loyalty programmes.

Interest, Default Fees, And Termination Rights

If you pay late, what happens?

Typical consequences might include interest, administration fees, default notices, and ultimately termination if the breach isn’t remedied. Even if a clause looks “standard”, it should be proportionate and workable in real life.

Variation Clauses (Can The Franchisor Change The Royalty?)

Some agreements allow the franchisor to increase fees during the term (or upon renewal). Sometimes this is tied to CPI, system upgrades, or a general discretion clause.

If you’re a franchisee, you want to understand:

• how often fees can change
• the maximum increase (if any)
• how much notice must be given
• whether you have any right to object or exit

If you’re a franchisor, you’ll usually want flexibility, but you also want a structure that franchisees will accept as fair and transparent (because that affects recruitment and retention across the network).

Are Franchising Royalties Regulated In New Zealand?

In New Zealand, there isn’t a single “Franchising Act” that sets mandatory royalty rates or a standard form disclosure regime (unlike some other jurisdictions). That doesn’t mean it’s a free-for-all, though.

Royalty arrangements still sit within New Zealand’s wider legal framework, including:

• Contract law: the franchise agreement is the central document that sets the rights and obligations
• Fair Trading Act 1986: franchisors must not mislead or deceive franchisees (including through earnings claims, ROI claims, or “it will cost you about X” statements that aren’t accurate)
• Commerce Act 1986: can be relevant in competition and pricing conduct in some settings
• Consumer Guarantees Act 1993: usually applies in consumer transactions, but may be relevant depending on how a franchisee sells goods/services (and whether the customer is a “consumer”)
• Privacy Act 2020: relevant where customer data is collected, shared, or centrally managed by the franchisor

Many franchise systems operating in New Zealand are also members of the Franchise Association of New Zealand (FANZ) and may follow its Code of Practice. Even if the code isn’t legally binding on non-members, it can influence expectations about good faith behaviour and disclosure.

Put simply: royalties are a commercial term, but you can’t sell them with misleading promises, and the agreement still needs to be drafted clearly and enforced fairly.

How Do You Assess Whether The Royalties Are “Worth It”?

The tricky part about royalties is that they’re not just a legal issue-they’re a business viability issue.

To assess whether a royalty is “worth it”, you’re really asking: will I earn enough profit after royalties (and all other required fees) to justify the risk and effort?

Here are practical ways to pressure-test royalty terms before you sign.

1. Build A Realistic Cashflow Model

Don’t rely on best-case numbers. Model:

• low, expected, and high turnover scenarios
• rent and outgoings (if you’ll be leasing premises)
• wages and payroll costs
• cost of goods / supplies
• royalties and marketing levies
• software subscriptions and transaction fees
• insurance and compliance costs

If the franchise agreement requires you to take a specific site (or accept a lease negotiated by the franchisor), it’s also worth understanding the lease risk profile and whether you’ll need documents like an Assigning A Lease arrangement later if you sell or exit.

2. Ask What Support You Actually Get For The Royalty

It’s not cheeky to ask this-it’s responsible. For example:

• How often do field managers visit?
• Is phone support available outside business hours?
• What training is included, and what costs extra?
• Who pays for system upgrades?
• What happens if the franchisor changes the software stack?

Ideally, the agreement and/or operations manual should align with the sales pitch. If the business was sold to you as “full support”, but the agreement is vague, that’s a mismatch worth fixing before you commit.

3. Clarify Marketing Levies vs Royalties

Many franchisees assume the royalty covers marketing. Often it doesn’t.

If you’re paying a separate marketing levy, you’ll want to understand:

• how the fund is administered
• what it can be spent on
• whether franchisees get reporting and transparency
• whether local marketing spend is required on top

4. Check What Happens If You Sell The Franchise

Royalties don’t just matter while you operate-they can affect resale value.

For example, if royalties are high and support is thin, a buyer may discount the value of the business. If royalties are fair and the system is strong, it can be easier to sell (and easier to get bank finance).

In many systems, you’ll also need to pay transfer fees or comply with a formal transfer process, which should be handled carefully so your exit isn’t delayed.

Depending on the deal structure, you might also deal with business sale documentation (for example, an Asset Sale Agreement) if you’re selling business assets rather than shares.

5. Don’t Ignore The “Hidden” Cost: Control

Royalties aren’t the only price you pay in franchising. You also give up some independence in exchange for system consistency.

That can include control over:

• pricing or promotions (depending on the model)
• suppliers and product range
• branding and local marketing
• store fit-out requirements
• opening hours and service standards

For many franchisees, that’s a good trade-off. But you want to go in with your eyes open, because “fees + control” is the real cost of buying into a system.

If you’re on the other side and building a franchise network, it’s common to protect brand consistency through well-drafted agreements and internal governance documents like a Company Constitution (particularly where you have multiple owners and want clear decision-making rules).

Key Takeaways

• Franchising royalties are ongoing fees paid by franchisees to franchisors, usually in exchange for continued access to the brand, system, and support.
• Royalties are commonly calculated as a percentage of gross sales, a fixed fee, or a hybrid/tiered structure, and the definition of “gross sales” matters a lot.
• Royalties may cover operational support and system access, but marketing levies, software fees, training costs, and compliance costs are often charged separately.
• In New Zealand, royalties aren’t set by a single franchising law, but franchisors must still comply with laws like the Fair Trading Act 1986 and the Privacy Act 2020.
• Before signing, you should model your cashflow and confirm exactly what support you get, how fees can change, and what happens if you sell or exit.
• Because franchise agreements are long-term and heavily contractual, it’s worth getting the terms reviewed so you’re protected from day one.

If you’d like help reviewing a franchise agreement or working through royalty and fee clauses before you commit, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.