Franchise Fee Bases
Separate contractual charges.
Estimated reading time: 1 minute
The FTC explains that franchise royalties may depend on gross income and remain payable when the outlet loses money. Advertising contributions can be separate.
Fictional agreement: monthly royalties equal 6% of defined gross sales, plus a separate 2% advertising contribution on that same base. Assume the base is verified, with no minimums or other adjustments.
Month 1 has $100,000 sales and $94,000 other operating expenses, excluding both fees. Royalties are $6,000 and advertising is $2,000. Operating result: $100,000 − $94,000 − $6,000 − $2,000 = a $2,000 loss.
Applying 6% to the $6,000 left before fees would incorrectly produce a $360 royalty. The agreement uses sales, not that subtotal.
Month 2 has $80,000 sales and $78,000 other operating expenses. Combined fees fall to $6,400, yet the operating loss increases to $4,400.
Lower fee dollars do not necessarily mean better performance. Check each fee’s contractual base and avoid counting it twice in expenses. These invented months exclude financing and taxes; they neither predict sales nor establish cash available on payment dates.
