How Franchise Royalties and Fees Work

The fee schedule is the business model

A franchisor’s continuing fees are not a detail of the deal. They are the deal. The royalty determines how much of every dollar you ring up belongs to someone else, the advertising obligation how much of the rest you must spend on the brand, and the long tail of technology, processing and compliance charges how much leaks out below that.

All of it appears in Item 6 of the Franchise Disclosure Document, headed “Other Fees,” alongside Item 5, which covers what you pay before opening. Item 6 is usually the densest page in the document and repays reading more than any other: unlike Item 19 it is mandatory, and it applies from your first month of trading.

This guide explains the mechanics, then works through four disclosed fee structures built in completely different ways.

Royalty bases

The headline royalty percentage is meaningless until you know what it is a percentage of.

Gross sales is the most common base: all receipts from goods and services, with a short list of exclusions. Jiffy Lube’s 2026 FDD, Item 6, excludes sales taxes, proceeds of sales of recovered materials and customer refunds. Note what is not excluded — discounts, comps, coupon redemptions and third-party delivery commissions are frequently inside the base, meaning you can pay royalty on revenue you never collected.

Net sales starts from gross sales and subtracts a defined set of deductions. Those deductions vary by system, and the definition is worth reading twice, because the same words carry different meanings in different documents.

Gross profit or profit share bases the royalty on what is left after certain costs. This is rare, and it changes the relationship: the franchisor’s revenue now depends on your expense management, which means the franchisor must have a say in your expenses.

Per-unit fixed royalties charge a set dollar amount per student, per member, per vehicle or per transaction. The percentage of revenue this represents is not fixed — it moves inversely with your pricing.

Minimum royalties set a floor. Some systems charge the greater of a percentage or a stated monthly minimum, which shifts risk onto the franchisee: in a weak month, the effective royalty rate rises.

Advertising is a second royalty

Almost every system charges an advertising contribution on top of the royalty, and buyers underweight it.

The ad fund or brand fund is a pooled contribution the franchisor administers, typically for national or regional campaigns. It is money you spend but do not control; Item 11 says what the franchisor may spend it on — including, in many systems, the cost of administering the fund and of producing materials it then sells to you.

Local marketing requirements are separate: a minimum you must spend in your own market. Some systems mandate a percentage, some merely suggest one, and some require a specified grand-opening spend and nothing thereafter.

Cooperative fees apply where franchisees in a market pool money for regional advertising. Co-op membership is sometimes mandatory, and the rate is sometimes set by member vote rather than by the franchise agreement, so it can change without the franchisor changing anything.

The critical question is whether these obligations stack or overlap. Jiffy Lube’s 2026 FDD, Item 6, sets an overall minimum advertising requirement of 4 percent of Gross Sales per year and provides that national fund and cooperative contributions count toward it — so the 1.5 percent national contribution and the 2.5 percent local or cooperative line together satisfy the 4 percent rather than adding to it. Read carefully for that word “inclusive.” Where it is absent, assume the obligations add.

Technology and event-driven fees

Technology charges have grown substantially and are now material in most systems: a point-of-sale software or support charge, a hardware lease or hardware-as-a-service subscription, payment terminal and switching fees, loyalty program charges, and a required broadband connection. Two features matter. They are often fixed dollar amounts, so they weigh most heavily on low-volume units — the opposite of a percentage royalty. And many are payable to affiliates or designated third parties rather than to the franchisor, which puts them outside any cap on franchisor fees.

Event-driven fees do not appear in your monthly P&L but can be large when they arrive: transfer fees when you sell, renewal fees at the end of the term, relocation and remodel charges, training tuition, interest and late fees, audit costs, and liquidated damages on early termination.

Item 6 should also tell you which fees are capped. Jiffy Lube’s 2026 FDD, Item 6, states plainly that where no cap is specified, fees may be increased without limit, and that some fees are not uniformly imposed. That is a common and honest formulation: the fee schedule you read today is a snapshot rather than a contract term.

Four systems, four structures

Jiffy Lube charges 4 percent of Gross Sales, reduced to 3 percent under a prompt-payment discount for franchisees current on all obligations, and increased to 5 percent if the required Pacesetter or Fast Lubes Supply Agreement is terminated (2026 FDD, Item 6). New locations pay no royalty for their first six months. Advertising is the 4 percent inclusive minimum described above. Technology charges include a POS support charge capped at $192 per month, hardware support at $73 per month and a Cisco Meraki licence at $18 per store per month, plus a POS equipment lease of $312 to $800 per month on a 36-month term. Audit expenses become payable if an audit finds Gross Sales understated by 2 percent or more.

Subway charges 8 percent of total gross sales as royalty and 4.5 percent of gross sales as an advertising contribution, both payable weekly by pre-authorized draft (2026 FDD, Item 6). Reduced rates apply at certain airport, transit and non-traditional locations, and for some multi-unit developers. On top of that sit a Restaurant Technology Fee of about $75 per month, a POS hardware-as-a-service package at about $57 per month, payment terminal lease and switching fees, a gift card redemption fee of 2.5 percent of each redeeming transaction, and a required Sub Club loyalty fee of 1.9 percent of gross sales on each transaction by a program member.

Kumon does not charge a percentage at all. Its royalty is $38 per enrolled student per subject per month after the initial Temporary License Period, and $19 for partially exempt or prorated-tuition students; during that period the rates are $42.75 and $21.38 (2026 FDD, Item 6). Math and reading are separate subject-franchises, so a student enrolled in both counts twice, and a $30 initial enrollment royalty is due for each new student. Required marketing is a New Center Marketing Fee of $300 per month from the seventh month, which Kumon remits to a designated digital advertising supplier rather than pooling in a national fund; no minimum local spend is currently required, though the FDD recommends at least $4,800 a year.

Christian Brothers Automotive uses a profit-share royalty: 50 percent of monthly “Split Profits,” defined as all revenue from the business minus “Shared Expenses” — expense items the franchisor approves and can change through its Confidential Operations Manual (2026 FDD, Item 6). Two features of that definition deserve attention. Owner salary, combined with a spouse or household dependent, counts as a Shared Expense only up to $60,000; and any expense that is not a Shared Expense requires an equal additional royalty payment, so an unapproved dollar of spending costs two dollars. Marketing was being charged at $12,500 a year for national and regional programs combined as of December 31, 2025 — about 0.42 percent of average total annual revenue across franchises open by that date — subject to a maximum annual cost of 3 percent of prior-year average revenue. Software runs about $11,000 a year, plus IT support at $200 a month, operating systems and internet failover at about $725 a month, and an administrative and accounting fee of $550 a month. The franchisee must also lease the land and building from the franchisor or an affiliate, at disclosed base rent of $22,000 to $38,000 a month rising 1.5 percent annually.

Computing your total fee load

The exercise is straightforward and almost nobody does it.

For a percentage-based system, add every obligation expressed as a percentage of sales, then convert the fixed-dollar charges into a percentage using a realistic sales assumption — not the system average, but the volume you actually expect. Jiffy Lube’s disclosed schedule works out, on our arithmetic, to 4 percent royalty plus a 4 percent inclusive advertising minimum, or 8 percent of Gross Sales, falling to 7 percent with the prompt-payment discount. Adding the disclosed recurring technology charges of roughly $283 a month plus a POS lease at the midpoint of its range brings the total to roughly 8.9 percent of sales at the $1,109,719 average disclosed in Item 19 — and to a visibly higher share at a first-quartile volume. Subway’s disclosed percentages add to 12.5 percent before technology and processing charges, and the loyalty fee cannot simply be added on top, because it applies only to member transactions.

For a per-unit royalty, the percentage depends on your pricing. As illustrative arithmetic only: at Kumon’s disclosed $38 per student-subject per month, a center charging an assumed $190 monthly tuition would pay 20 percent of tuition revenue in royalty, and one charging an assumed $150 about 25 percent. The FDD does not disclose tuition levels, and Kumon reserves the right to impose tuition limits on 60 days’ notice, so that ratio is not fully within a franchisee’s control.

For a profit-share royalty, no percentage-of-sales figure exists, and the meaningful diligence question shifts entirely: not “what rate,” but “who decides what counts as an expense.”

Then ask three questions of whatever number you arrive at. Which fees are capped, and which may be raised at the franchisor’s discretion? Which are paid to the franchisor and which to affiliates or designated vendors, since the second group is often outside any cap? And how does the total load behave at a weak volume, where fixed dollar fees consume a much larger share of a smaller top line?

This guide is informational only. Fee schedules change with each annual FDD; the figures above come from the 2026 documents cited and may not be current. Nothing here is financial, legal or tax advice. Obtain the current FDD and consult qualified professionals before investing.

Related

• How to Read a Franchise Disclosure Document (FDD)
• What Item 19 Actually Tells You
• How to Read Item 20 (Outlets and Franchisee Information)
• AUV vs. EBITDA vs. Owner Income