The Different Ways Franchisors Make Money
Every franchise system needs revenue to operate. That revenue supports things like training, technology, marketing, and brand development. The exact mix depends on how each franchisor structures their system.
- Royalties on sales
This is the most common structure in franchising. You pay a percentage of your gross sales to the franchisor. It naturally aligns the growth with the payments to the franchisor. - Advertising fund contributions
Many brands collect a small percentage from each location to support marketing. That can include national advertising, regional campaigns, websites, or digital marketing tools.Franchise agreements often set a maximum contribution rate — for example, a franchisor may be allowed to collect up to a certain percentage of sales — but the actual rate in use is sometimes lower. The specific amount can change over time, so it’s important to check both the allowed maximum and the current rate when reviewing a Franchise Disclosure Document (FDD). - Parts or supply margins
Some franchisors, or companies they’re related to, sell parts or supplies directly to franchisees. In many cases, franchisees are required to buy certain items, or a percentage of their parts, from related-party vendors.In those cases, part of the franchise system’s revenue comes from margins on parts in addition to royalties. It’s important to understand how those purchasing requirements work and how they may affect your choices when buying parts and serving customers. - Technology or service fees
Many franchisors charge ongoing fees to cover required technology or other operational systems. This can include things like shop management software, phone systems, or customer service platforms.These are the kinds of costs every shop has, whether you pay them to a vendor yourself or through the franchisor. The goal is simply to keep everyone on the same systems so customers get a consistent experience wherever they go. - Real estate and leasing
Some franchisors own the properties where their shops operate. In those cases, your rent payments may provide income for the franchisor or one of its related companies.This could lower your startup costs when a new building is required, because the franchisor builds it and then leases it back to you. It also means the franchisor is setting the lease terms, which adds another layer to how the financial relationship works. While not common in every system, it is worth understanding how property ownership or leasing is handled when you review a franchise opportunity. - Shared investments or profit splits
In some setups, the franchisor helps fund your buildout or operation and then shares in the profits. It can lower your startup costs but also makes the financial relationship more complex.
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Royalty on Sales:
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Click each number for a description.
Why Models Differ
Every shop has the same basic costs: marketing, a website, a management system, reliable parts, and a building to work from. The main difference between franchisors is how they decide who pays for those things — and how the money flows. Some franchisors collect funds centrally, like an ad fund or tech fee, and handle those programs for everyone. Others tell franchisees which systems or vendors to use and have you pay those costs directly. Either way, those expenses have to be covered; it’s just a matter of where they show up.
In some systems, the franchisor or a related company also sells parts or required products. That can simplify purchasing and keep quality consistent. It can also mean the franchisor earns money from product margins instead of — or in addition to — royalties. That’s not necessarily bad; you’d be paying a supplier’s margin anyway. The key is understanding how those prices are set and how that affects the balance between you and your franchisor.
All of these arrangements are explained in the Franchise Disclosure Document (FDD), including whether the franchisor owns or is connected to any required suppliers. The important thing is to know what each payment supports, how it’s used, and whether it keeps everyone’s incentives pointed in the same direction.