Will is currently completing his Juris Doctor at the University of Melbourne and is interested in helping to provide equitable and efficient access to legal resources.
Franchising can be a great way to grow a business without personally funding (and managing) every new location.
But if you're looking at franchising your business - or buying into a franchise - one term will come up again and again: royalties.
Franchising royalties can feel confusing at first because they're not just "a fee". They're often tied to performance, they can be calculated in different ways, and they usually come with strict reporting rules. If you get them wrong (or draft them vaguely), you can end up with disputes, cashflow issues, or a franchise relationship that breaks down fast.
Below, we'll walk you through what franchising royalties are in the UK, how they're usually structured in 2026, what they typically cover, and the legal points you should pay attention to before you sign anything.
What Are Franchising Royalties?
Franchising royalties are ongoing payments a franchisee makes to a franchisor for the right to keep operating the franchise business under the franchisor's brand and system.
In plain English: the franchisee pays you (the franchisor) regularly because they're using your brand, your "know-how", your operating methods, your supply chain connections, and the ongoing support you provide.
Royalties are usually paid:
- weekly (common for food/hospitality and retail),
- monthly (common for professional services), or
- sometimes quarterly (less common, but seen in some B2B models).
Royalties are different from a franchise fee (also called an initial fee or joining fee). The initial fee is typically paid upfront to enter the franchise system. Royalties are paid for as long as the franchise agreement remains in force.
Royalties are usually set out in a Franchise Agreement and supported by detailed operational rules and reporting requirements (often in an operations manual).
Are Royalties Mandatory In Every Franchise?
Not always - but they're extremely common.
Some franchise systems reduce or remove royalties and instead earn money through:
- mandatory supply arrangements (mark-up on products),
- technology platform fees,
- central marketing levies, or
- licence-style fees (which are "royalties" by another name).
If a system says "no royalties", it's worth checking the full commercial picture to see how the franchisor earns ongoing revenue - because there's almost always an ongoing income stream somewhere.
How Are Franchise Royalties Calculated In The UK?
There's no single "standard" royalty model in UK franchising. What's appropriate depends on the industry, the maturity of the franchise system, and how much ongoing support the franchisor is providing.
That said, most franchising royalties fall into a few familiar structures.
1. Percentage Of Turnover (Gross Sales)
This is one of the most common models.
The franchisee pays a fixed percentage of their gross revenue (often called "turnover" or "gross sales"). For example, 6% of weekly gross sales.
Why franchisors like it: it scales as the franchise grows, and it aligns incentives (the franchisor benefits when the franchisee sells more).
Why franchisees worry about it: it's payable whether or not they're profitable. A franchisee can have high revenue but tight margins, and still owe a significant royalty.
Key drafting issue: you need a very clear definition of "gross sales" (including what is included/excluded, treatment of refunds, vouchers, delivery platform sales, tips/service charges, VAT, and discounts).
2. Fixed Fee Royalties
Some franchises charge a set weekly/monthly royalty amount (for example, ?350 per week) regardless of revenue.
Why it can work: it's predictable for both sides and can be easier to administer.
Risk to franchisees: in slow months, the fee can become unaffordable and put pressure on cashflow.
Risk to franchisors: if a franchisee performs extremely well, the franchisor may not share in that upside (unless there are other fees).
3. Tiered Royalties
Tiered royalties apply different rates depending on performance. For example:
- 5% on the first ?10,000 of weekly turnover,
- 4% on the next ?10,000,
- 3% above that.
This can be used to reward scale (especially where franchisees take on higher operating costs as they grow).
4. "Cost Plus" Or Product Margin Models
Some systems rely less on a stated royalty and more on margin earned via required supply arrangements.
This is common where the franchisor controls manufacturing, imports, or a central supply chain (for example, branded products, uniforms, equipment, or ingredients).
Important: the legal and commercial risk here is transparency. Franchisees will want to understand what they're paying for and whether supply pricing is fair.
5. Hybrid Models (Royalty + Marketing Levy + Tech Fees)
In 2026, it's increasingly common for franchise systems to use a "stack" of fees, for example:
- ongoing royalty (e.g. 6% of gross sales),
- marketing levy (e.g. 2% of gross sales),
- software/platform fee (e.g. ?99/month),
- training refreshers or audit fees as needed.
Hybrid models can be perfectly legitimate - but only if they're drafted clearly and the franchisee understands the full cost base from day one.
What Do Franchise Royalties Usually Cover?
Franchisees often ask: "What am I actually getting for the royalty?"
The answer depends on the franchise system, but royalties typically fund a mix of brand licensing, support, and infrastructure.
Brand Use And IP Access
A big part of franchising is permission to trade under the brand - including logos, colours, slogans, and sometimes proprietary product names.
That's why franchisors should take intellectual property seriously (and protect it properly). It's much easier to enforce brand standards across a network when your IP position is strong, including having a Trade Mark registration strategy that matches how the franchise actually operates.
Operational Systems And Know-How
Royalties usually support the franchisor's ability to develop and maintain the franchise system, including:
- operations manuals and updates,
- approved supplier lists,
- pricing guidance and promotions,
- quality control processes, and
- new product/service development.
Training And Ongoing Support
Many franchisors provide:
- initial training for franchisees and their managers,
- refresher training,
- launch support (site opening checklists, first-week support), and
- ongoing business coaching.
It's worth being clear in the contract about what support is included and what is charged separately (because "support" is one of the most common sources of franchise relationship tension).
Central Services (Especially In 2026)
Modern franchise systems often run central services that franchisees rely on daily, such as:
- booking platforms,
- centralised payment systems,
- CRM or customer databases,
- national customer service,
- data analytics dashboards.
If royalties are paying for these tools, your agreement should clearly deal with service levels, access rights, data ownership, and what happens when the franchise ends.
What Legal Issues Should You Watch For With Franchise Royalties?
Royalties are commercial - but they create legal risks if the documents are vague or one-sided.
Here are the issues we regularly see franchisors and franchisees trip over.
Royalties Live (Or Die) By Definitions
Most royalty disputes aren't about the percentage. They're about the definition of what the percentage applies to.
Your agreement should be crystal clear on:
- Gross sales/turnover: what counts as a sale and when is it "earned?"
- VAT treatment: is the royalty calculated on amounts including or excluding VAT?
- Refunds and chargebacks: are these deducted, and if so, when?
- Gift cards and vouchers: are they counted at sale or redemption?
- Third-party delivery platforms: is it calculated on the customer's total spend, or what the franchisee actually receives after platform commissions?
- Discounts and promotions: are staff discounts included? What about "franchisor-mandated" discounts?
If the drafting is sloppy, you can end up with a "grey area" that becomes a costly argument later.
Audit Rights And Reporting Obligations
Most franchisors need franchisees to provide regular sales reports and to keep records that can be audited.
Common legal points include:
- how often reporting is required,
- what software/POS system must be used,
- whether the franchisor can access sales data in real time,
- how audits are conducted, and
- who pays for an audit if under-reporting is found.
If you're collecting or accessing identifiable customer data through franchise reporting systems, you'll also need to think about data protection compliance (roles, responsibilities, and lawful handling). Where the franchise includes online sales or a central website, having proper Privacy Policy terms in place is often part of the baseline compliance work.
Marketing Levies: Separate Fee, Separate Rules
Many franchises charge a marketing levy (sometimes called an advertising fund contribution) in addition to royalties.
From a legal drafting perspective, you should treat this like its own mini-system, including:
- what the fund can be spent on,
- whether local marketing is required on top,
- whether franchisees get reporting on fund expenditure, and
- whether unused funds roll over year to year.
A surprisingly common franchisee complaint is: "I'm paying marketing fees but I can't see what I'm getting." You can reduce that friction upfront with clear clauses and practical reporting.
Non-Payment, Default Interest, And Termination
Royalties are usually treated as a core payment obligation. If they aren't paid, franchisors often have strong enforcement rights.
Key contract questions include:
- When is a payment "late?"
- Is there a grace period?
- Does interest apply?
- Is non-payment a breach that allows termination, or does it require warnings first?
Because termination rights are so significant in franchising, you'll want the agreement to be properly structured as a contract that's enforceable in the UK - including making sure the fundamentals are there for Legally Binding terms.
Changing Royalties Mid-Term
Many franchisors want flexibility to change the royalty rate or the fee structure over time (especially as systems evolve).
Franchisees, understandably, want cost certainty.
In the UK, it's usually risky to rely on a vague "we can change fees whenever we like" clause. Even if it's technically written into the agreement, it can damage trust and lead to disputes - and it may be challenged depending on context and how it's implemented.
If changes are needed, it's often cleaner to use a formal variation process with proper drafting and record-keeping, which is where Amending A Contract becomes a practical (and legal) must-have rather than an afterthought.
Resales, Transfers, And "Who Pays What" On The Way Out
Franchise relationships change. Franchisees sell. Businesses restructure. Sometimes a franchise needs to move to a new entity.
Your documents should deal with:
- transfer/assignment approval rights,
- transfer fees,
- whether arrears must be paid before a transfer is approved, and
- what happens to ongoing obligations if the franchise is taken over.
In some cases, a formal Deed Of Novation is used to properly swap parties so obligations sit with the new owner (and the old owner is released), rather than leaving a messy trail of liability.
How Do You Negotiate Franchise Royalties Without Derailing The Deal?
Whether you're the franchisor or franchisee, it's normal to want to negotiate royalties. The trick is to do it in a way that keeps the model commercially workable and legally clear.
If You're A Franchisor
When you're setting (or defending) a royalty model, ask yourself:
- Is the royalty aligned with what we actually provide? If you're charging premium royalties, you'll usually need premium support and systems to match.
- Can franchisees still make a fair profit? If royalties squeeze margins too hard, franchisees can't reinvest, staff turnover increases, and performance drops.
- Is our reporting/audit process proportionate? You need visibility, but overly invasive controls can harm trust.
- Can we explain the model simply? If it takes an hour to explain the fee structure, it's probably too complicated.
Also, remember that royalties don't exist in isolation. They interact with restrictions (like exclusivity, brand controls, and restraint provisions). If your franchise includes strong restraint clauses, you'll want them carefully drafted and proportionate - sometimes supported by a separate Non-Compete Agreement approach depending on how the system is structured.
If You're A Franchisee
Before you accept a royalty model, you'll want to check:
- What exactly is the royalty calculated on? Ask for examples with real numbers.
- What other fees apply? Marketing levy, tech fees, training fees, audit fees, renewal fees.
- What support is included? Make sure support is specific, not just "as we deem appropriate".
- What happens if sales drop? Fixed fees can be brutal in a downturn.
- Can the franchisor change fees? If yes, how and when?
If something feels unclear, don't just "hope it'll be fine in practice". Most franchise disputes start with unclear documents and mismatched expectations.
A Quick Note On "Fairness" In Franchise Royalties
There's no universal rule that a particular royalty percentage is "fair" in the UK. It depends on the business model.
Instead of focusing only on the percentage, focus on the full value exchange:
- What do you get (brand, systems, support, exclusivity, supply arrangements)?
- What do you give up (independence, pricing freedom, supplier freedom, exit flexibility)?
- Does the overall arrangement still work financially and legally?
Getting the legal foundations right from day one makes this much easier - because a well-drafted agreement doesn't just say what the fees are. It sets expectations, reduces grey areas, and gives both sides a workable roadmap when issues come up.
Key Takeaways
- Franchising royalties are ongoing payments a franchisee makes to a franchisor, usually set out in the franchise agreement and paid weekly or monthly.
- Royalties are commonly calculated as a percentage of gross sales, a fixed fee, or a tiered/hybrid structure with additional marketing and technology fees.
- The biggest legal risk is often not the royalty rate - it's unclear definitions (what counts as turnover, how refunds/vouchers are treated, whether VAT is included, and how platform sales are handled).
- Strong franchising documents should clearly cover reporting, audit rights, late payment/default, termination triggers, and how fees can (or can't) change during the term.
- Transfers and resales are common, so it's important to document who remains liable for outstanding royalties when a franchise changes hands.
- If you're unsure, don't DIY it - franchising terms need to be tailored to your model so you're protected as the franchise network grows.
If you would like help with franchising documents (including setting up royalties clearly and enforceably), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.
