Franchise Genie Editorial Team
Key Takeaways
- Franchisors typically earn money from initial franchise fees, ongoing royalties, technology and training fees, supplier rebates, product sales, and company-owned units.
- Royalties are the most important revenue stream for a healthy franchisor because they depend on franchisees' sales continuing year after year.
- A franchisor that relies heavily on initial franchise fees may be more focused on selling units than on supporting the owners it already has.
- FDD Item 8 discloses revenue the franchisor earns from required purchases, and Item 21 shows its full income statement.
How do franchisors make money? Mostly from the fees their franchisees pay. The core streams are the initial franchise fee, ongoing royalties on gross sales, and a range of smaller charges such as technology and training fees. Many franchisors also earn supplier rebates, sell products to franchisees, or run company-owned units. The mix matters to you, because how a franchisor earns its money shapes where it spends its attention.
A franchisor that depends on royalties does well when its existing owners grow sales. A franchisor that depends on selling new units does well when it signs buyers, whether or not those buyers thrive. If you are new to the franchise relationship, our guide to what is a franchise covers the fundamentals.
How do franchisors make money? The main revenue streams
| Revenue stream | How it works | Where it is disclosed |
|---|---|---|
| Initial franchise fee | One-time payment when you sign, commonly $25,000 to $50,000 | Item 5 |
| Royalties | Ongoing percentage of gross sales, commonly 4 to 8 percent, or a flat fee | Item 6 |
| Brand or marketing fund | Pooled contributions, commonly 1 to 4 percent of gross sales, for system-wide advertising | Items 6 and 11 |
| Technology fees | Monthly charges for required software, apps, or point-of-sale systems | Item 6 |
| Training fees | Charges for initial training beyond what is included, or for additional staff | Items 5, 6, and 11 |
| Supplier rebates and allowances | Payments from approved vendors based on franchisee purchases | Item 8 |
| Product and equipment sales | Required items sold by the franchisor or an affiliate | Items 5, 6, 7, and 8 |
| Company-owned units | Profits from locations the franchisor runs itself | Item 20 (unit counts) and Item 21 (financials) |
| Transfer and renewal fees | Charged when you sell your unit or renew your agreement | Item 6 |
| Financing and real estate | Interest on franchisor financing, or rent on subleased locations | Items 10 and 6 |
| Development fees | Paid upfront for multi-unit or area development rights | Item 5 |
The full Franchise Disclosure Document is the source for every one of these. The FTC Franchise Rule requires franchisors to disclose them before you sign. If any of the terms are unfamiliar, our franchise terms glossary defines each in plain English.
Royalties: the engine of a healthy franchisor
Royalties are the stream that aligns the franchisor’s interests most closely with yours. Because they are usually a percentage of gross sales, the franchisor earns more when your unit sells more. A franchisor that depends on royalties has a strong reason to invest in training, marketing, and support that grow franchisee revenue.
The alignment is not perfect. Royalties are charged on sales, not profit, so a franchisor can push for higher revenue even when it raises your costs, such as through discounting, longer hours, or new menu items that are expensive to execute. Your profit and the franchisor’s royalty income usually move together, but not always.
Some systems charge a flat royalty instead of a percentage. A flat fee means the franchisor’s income doesn’t grow with your sales, which can benefit high-volume owners but weakens the franchisor’s direct incentive to help you grow.
Initial franchise fees: the stream to watch
Initial franchise fees are paid once, when you sign. They are meant to cover the franchisor’s cost of recruiting, training, and launching a new owner. In a healthy, mature system, they are a modest share of total revenue.
The concern arises when a franchisor depends on new franchise fees to pay its bills. That franchisor has a strong incentive to sell units, sometimes to buyers who are a poor fit, sometimes into markets that can’t support them. Its support team may be stretched thin by a constant flow of openings.
How to check the revenue mix
FDD Item 21 contains the franchisor’s financial statements, usually audited. Look at the income statement and compare:
- Revenue from initial franchise fees
- Revenue from royalties
- Revenue from other sources, such as product sales or rebates
Consider a hypothetical young franchisor whose income statement shows most of its revenue coming from initial franchise fees and very little from royalties. That pattern is common early in a franchisor’s growth, because there are few operating units paying royalties yet. It is not automatically a problem. It does mean you should ask how the franchisor will fund support if unit sales slow down, and look closely at its cash position and debt.
A CPA can help you read Item 21 if financial statements are new to you.
Supplier rebates and product sales
Many franchisors require you to buy certain products, equipment, or services from approved suppliers, sometimes from the franchisor itself or an affiliate. The franchisor may receive rebates, allowances, or a markup on those purchases.
This is legal and common, and it isn’t automatically bad for you. A franchisor may use its system-wide buying power to negotiate prices lower than you could get alone, keeping a small rebate in the process. But it can also mean you pay more than open-market prices so the franchisor can profit.
FDD Item 8 must disclose required purchases and whether the franchisor or its affiliates earn revenue from them, often including the amount. When you call franchisees, ask directly how required-supplier pricing compares with what they could get elsewhere.
The brand fund: whose money is it?
The marketing or brand fund is pooled franchisee money for system-wide advertising. In most systems, it is meant to be spent on marketing, not kept as franchisor profit. But agreements vary in what the franchisor can charge to the fund, such as staff salaries or administrative costs.
FDD Item 11 explains how the fund is managed. Look for:
- Whether company-owned units contribute at the same rate
- Whether the franchisor can use fund money for administrative costs or franchise sales marketing
- Whether the fund is audited or reported to franchisees
- How spending decisions are made, and whether franchisees have input through an advisory council
Company-owned units
Some franchisors operate their own locations. These generate profit directly and can be a healthy sign, since the franchisor is testing its own system with its own money. Watch how company-owned units appear in Item 20. If the franchisor is closing its own units, ask why. If it is reacquiring franchised units, ask whether that reflects strategy or struggling owners.
Other fees that add up
Smaller fees deserve attention because they accumulate over a 10-year term:
- Technology fees that rise as the franchisor adds platforms
- Renewal fees at the end of your term
- Transfer fees when you sell
- Audit fees if an audit finds underreported sales
- Late fees and interest on overdue payments
- Conference or convention fees
None of these is unusual. The question is whether the total is reasonable for what you receive.
Why buyers should care about franchisor economics
How a franchisor makes money predicts how it will behave. The FTC’s consumer guide to buying a franchise encourages buyers to understand all the fees and the franchisor’s financial condition before committing, and this is why.
| If the franchisor earns mainly from | It has a strong incentive to |
|---|---|
| Royalties | Grow existing franchisees’ sales |
| Initial franchise fees | Sell more units |
| Supplier rebates and product sales | Increase franchisee purchasing volume |
| Company-owned units | Protect and grow its own locations |
Most franchisors earn from several streams at once. The healthiest systems tend to rely on royalties from a stable base of successful owners. Territory policy is one place where these incentives show up, since a franchisor focused on unit sales may draw smaller territories or place units closer together. Read our guide to franchise territory to understand what protections to look for.
Questions to ask about franchisor revenue
- What share of your revenue comes from royalties versus initial franchise fees?
- Do you or your affiliates earn revenue from required purchases, and how much?
- How do required-supplier prices compare with open-market prices?
- Can the brand fund be used for administrative costs or franchise sales marketing?
- How many support staff do you employ per operating unit, and how has that changed?
- If franchise sales slowed for a year, how would support be funded?
Bring these to your franchise attorney and your franchisee calls. Our guide on how to choose a franchise shows where they fit in a full evaluation.
Choose a franchisor whose incentives match yours
Understanding franchisor economics is one of the best defenses against the franchise myths that lead buyers into bad deals. Fees are a normal part of franchising. What matters is whether the franchisor earns its money by helping owners like you succeed.
Before you evaluate franchisors, figure out which industries fit you. Take the free Franchise Genie assessment to see your owner archetype and three industry categories matched to your goals, budget, and involvement level.
Frequently Asked Questions
What is the main source of income for a franchisor?
For most mature franchisors, ongoing royalties are the main source of income. Royalties are commonly 4 to 8 percent of each franchisee's gross sales, paid weekly or monthly for the full term of the agreement. Initial franchise fees, supplier rebates, technology fees, product sales, and company-owned units add to revenue, and the mix varies by brand and by stage of growth.
Do franchisors make money from suppliers?
Many do. Franchisors may receive rebates, allowances, or other payments from suppliers based on franchisee purchases, or may sell required products to franchisees directly. These arrangements must be disclosed in FDD Item 8, including whether the franchisor or its affiliates earn revenue from required purchases. Rebates are not automatically bad, but you should understand whether they raise your costs.
Where does the marketing fund money go?
The brand or marketing fund pools franchisee contributions, commonly 1 to 4 percent of gross sales, to pay for system-wide advertising and marketing. FDD Item 11 explains how the fund is administered, whether the franchisor can use part of it for administrative costs, whether company-owned units contribute, and whether it is audited. Ask franchisees whether fund spending produces results in their markets.