Franchise fee vs royalty

Your upfront payment appears in the Initial Fees section, Item 5 of the FDD. That item covers all the payments owed to the franchisor ahead of opening day, so the franchise fee may not be the only payment you'll find listed there.

That fee is just one part of your total opening cost. Ace Hardware's franchise fee is $5,000, but its full Item 7 startup range lands anywhere between $603,850 and $2,001,550. There's more detail on that total in the Item 7 breakdown.

In some cases, and the FDD explains when. Item 5 has to state whether the initial fees are refundable, and on what terms. Every franchisor writes its own rules, so one brand's policy tells you nothing about the next one.

It pays to read that part of Item 5 before any money changes hands, since that's the spot where the refund terms are set down in writing. When Item 5 says nothing is refundable, treat the money as spent the moment you pay it.

You'll find royalties in Item 6, called Other Fees. That item lays out, in a table, each fee owed after you open, covering things like royalty payments, advertising contributions, transfer fees and renewal fees.

A royalty is most often a percentage of the gross sales you bring in each week or month. Gross sales is every dollar customers pay you, before rent, wages or any other expense comes out. A few brands charge a set monthly amount instead, and some combine both approaches.

Plenty of brands also charge a marketing fund fee in addition to the royalty. That money gets pooled by the franchisor to fund brand advertising, and it appears in Item 6 as well.

Yes, they are. Most royalties track sales, not profit, so you still owe them in months when the business runs at a loss. You might also owe them for the full term of the agreement, even when the franchisor falls short of what you expected.

Certain brands set a floor as well. F45 Training charges the greater of 7% of gross sales or $2,500 monthly, which means even a weak month costs you $2,500 or more.

The numbers below come from each brand's most recent FDD filed in the Minnesota registry, drawn from the Item 5 and Item 6 sections.

A small franchise fee doesn't guarantee small ongoing costs. Chick-fil-A lists a $10,000 initial fee, yet takes 15% of gross receipts after equipment rent and a services fee, along with half the monthly profit. Ace Hardware skips the royalty entirely because it's dealer-owned, run as a co-op.

You pay the franchise fee a single time, so the exact amount is known before you sign anything. The royalty comes due every week or month for the whole agreement, and you owe it even in months that end in the red. When you compare brands, look at both numbers side by side instead of choosing whichever one asks less to get in.

You can compare a few brands' fees, royalties and startup costs side by side on the franchise cost comparison, or learn more about the document as a whole on the FDD guide.