Buy a Franchise
Understanding what constitutes fair royalty and advertising fee structures can help candidates evaluate true value beyond the percentages listed in the FDD.
Royalties and advertising fund contributions are two of the most important numbers in the Franchise Disclosure Document, especially for franchise buyers in 2026, because they influence cash flow and long-term performance.
A fair fee structure isn’t defined by hitting a magic percentage. According to Chad Palmer, chief marketing officer of United Franchise Group, it’s about balance.
“A ‘fair’ fee structure is one where the brand can profitably deliver what it promises and the franchisee can still hit healthy sales targets,” Palmer said.
Across the industry, many systems fall into familiar ranges. Royalties often land between 4% and 8%, while advertising fund contributions commonly range from 2% to 5%. But Palmer cautions against evaluating those numbers in isolation.
“The right answer depends on what the franchisor is actually providing,” he said.
That “what” includes marketing support, lead generation, technology platforms, training, field support, call centers and ongoing brand investment.
Fee structures can vary widely by category.
“Category-wise, restaurants tend to sit toward the higher end because marketing and operational support are heavier,” Palmer said.
Consumer-facing brands often require ongoing advertising, brand oversight and consistent operational standards, which can increase the overall cost of supporting the system. Service brands tend to rely more on centralized digital marketing, search visibility and call handling, which often influences how their fee structures are designed.
The takeaway for candidates is that higher fees aren’t inherently negative, as long as they reflect real investment in the brand engine.
High royalties often get the most scrutiny, but Palmer says candidates should be equally wary of unusually low fees.
“Very high royalties can be a red flag if there’s no clear, measurable value coming back,” he said. “But honestly, very low royalties can also be a red flag if it means the franchisor isn’t resourced to support growth or is making money elsewhere.”
Those “elsewhere” revenue sources can include supplier markups, mandatory vendors or layered technology fees that don’t show up as headline percentages.
“The key question is: ‘Are the actions and strategies of the franchisor aligned with franchisee success?’” Palmer said.
Many candidates assume that higher overhead automatically means higher franchise fees. Palmer says the reality is more nuanced.
“There’s not a perfectly clean correlation with overhead as there are so many outside factors, such as price per square foot rent differences in different cities and states,” he said. “Fees tend to track more with how much the brand needs to invest to generate demand and maintain standards.”
Even when the royalty and ad fund percentages look reasonable, Palmer urges candidates to look deeper.
“The big one is ‘effective fees’ — the costs that function like royalties but don’t show up as a percentage line item,” he said.
A low advertised royalty can be misleading if the franchisee’s actual cost structure is inflated through required software, vendor programs or additional operational expenses.
“A ‘low royalty’ can be misleading if the franchisee’s true cost structure gets inflated through the back door,” Palmer said.
Some franchisors offer more flexible fee models, including step-up royalties for new owners or reduced percentages for multi-unit operators. When designed thoughtfully, these structures can be helpful.
“A step-up royalty can help a new owner invest more into hiring and marketing early,” Palmer said.
Multi-unit discounts can also make sense when they reflect lower marginal support costs as an operator scales. However, Palmer cautions candidates to confirm that those savings aren’t quietly offset later.
“The caution is making sure the ‘discount’ is real,” he said. “That as the unit KPIs improve, there aren’t new fees introduced to offset it.”
For more information on royalty fees, check out these articles on 1851 Franchise:
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