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Franchise agreements will almost always contain some form of royalty, which is a monetary amount payable to the franchisor by you every week or every month, depending on the agreement. The continuing royalty keeps the franchisor financially able to administer the franchise system. Franchisors need royalties as much as franchisees need profit from sales.

Although one often sees royalty rates of between 5 and 8 percent in the restaurant industry, this may not be appropriate in other industries. It may be wise to make inquiries of franchisees within different franchise systems in the same industry if the royalty rate is considered too high in the circumstances. Often, start-up franchisors have no scientific method to their selection of the initial franchise fee and royalty amounts; they simply pick what they think the going rate is. If the “going rate” for that industry is less in other systems, perhaps this is worthy of discussion with the franchisor. Consulting a publication such as the current year’s edition of The Franchise Annual will give you an overview of what the going rates are in various business categories.

Note that franchisors will often have a clause in the agreement that provides that under no circumstances will the franchisee “withhold any royalty or other payment due and owing to the franchisor.” It goes without saying then, that in the absence of special circumstances, failure to pay royalties is normally considered a material breach of the franchise agreement that could lead to the franchisee’s termination by the franchisor. (See Chapter 8 for more information about royalties.)