Ongoing Costs: Royalties, Marketing Fees & Operating Expenses

After the initial investment, franchisees must plan for ongoing costs that continue throughout the life of the franchise agreement. These expenses support the franchisor’s system, fund brand-wide marketing, and cover day-to-day operations at the local level. Understanding these recurring obligations is essential for building accurate financial projections and evaluating long-term profitability.

The Three Main Types of Ongoing Costs

Franchisees typically face three categories of recurring expenses: royalties, marketing fees, and operating expenses. Each plays a different role in sustaining the business.

1. Royalty Fees

Royalty fees are the franchisor’s primary source of recurring revenue. These payments compensate the franchisor for continued use of the brand, systems, training resources, technology, and operational support.

Common Royalty Structures

• Percentage of gross sales (most common): typically 4%–8%
• Flat fees: often used in service-based or home-based franchises
• Hybrid models: combination of percentage and fixed amounts

Royalties are usually paid weekly or monthly and are calculated on gross sales, not net profit.

2. Marketing and Advertising Fees

Marketing fees support the brand’s national or regional advertising efforts, along with digital campaigns, brand management, and promotional materials.

Types of Marketing Contributions

• National marketing fund: 1%–3% of gross sales
• Local marketing spend requirements: fixed monthly minimums or percentages
• Co-op advertising: shared regional campaigns

These fees ensure that the brand maintains visibility across all markets while allowing franchisees to focus on local outreach.

3. Operating Expenses

Operating expenses vary by industry and business model. These costs are not paid to the franchisor but are essential to the daily operation of the franchise.

Typical Operating Costs

• Rent and utilities
• Payroll and employee benefits
• Inventory and supplies
• Insurance
• Equipment maintenance
• Technology subscriptions
• Local marketing and promotions
• Professional services (accounting, payroll, legal)

These expenses make up the bulk of a franchise’s monthly operating budget.

Additional Recurring Fees (Depending on the System)

Some franchises require other ongoing payments, including:

Technology Fees

Support for POS systems, CRM tools, scheduling platforms, or data dashboards.

Training or Certification Fees

For new employees, advanced programs, or compliance updates.

Renewal Fees

Paid when renewing the franchise agreement at the end of its term.

Audit Fees

Charged if the franchisor conducts an audit and discovers underreported sales.

Supplier Requirements

Franchisees may need to buy products or materials from approved vendors, which can affect margins.

All recurring fees are detailed in FDD Item 6, while operational assumptions often appear in the franchisor’s financial models or internal planning tools.

Why These Costs Matter for Financial Planning

Understanding ongoing costs is critical for:

• Cash flow management
• Break-even analysis
• Long-term profitability
• Multi-unit planning
• Evaluating the strength of a franchise system

Royalties and marketing fees support the brand, but operating expenses determine day-to-day performance. Franchise buyers should review each cost category in detail and benchmark them against similar franchises to validate the financial model.

The Bottom Line

Ongoing costs are a central part of franchise ownership. Royalty fees support the brand and operating system, marketing contributions fund brand growth, and operating expenses sustain the day-to-day business. Clear understanding of these recurring obligations helps franchisees build accurate projections, maintain profitability, and assess whether the system aligns with their financial goals.