Franchise Royalty

An ongoing fee paid to a franchisor, typically calculated as a percentage of gross revenue, in exchange for continued use of the franchise system and brand.

Example

A 6% royalty on 900,000 of annual revenue costs a franchisee 54,000 a year, deducted before the business's discretionary earnings are calculated.

Important

It is a permanent operating cost that transfers to every future owner for as long as the franchise agreement runs, and it is already subtracted before the reported SDE, not something a new owner can remove.

Related terms

• Franchise Fee — An upfront payment made to a franchisor for the right to operate a franchised business under its brand and system, separate from the ongoing royalty.
• Franchise Disclosure Document — A document required in many jurisdictions before a franchise sale, setting out the franchisor's fees, obligations, territory rules, litigation history and the terms governing renewal and resale.
• Seller's Discretionary Earnings (SDE) — A reconstructed measure of a small business's earnings that starts from reported net income and adds back the owner's salary and other discretionary or non-recurring items, used to price owner-operated businesses.

Lessons that explain it

• Franchise royalties and goodwill amortisation both compound quietly over the holding period — Beyond key-person and concentration risk, a small-business purchase carries recurring costs and tax treatment that materially change the price a buyer can justify and the return a seller actually keeps - none of which shows up in a headline SDE multiple. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (12 min)

All 578 terms in the Investing glossary