Most franchise agreements include a royalty, and most prospective franchisees skim right past the structure to get to the number. That’s backward. The structure — not just the rate — determines how your costs behave in a slow month, a great month, and everything in between. Two franchises with similar-looking royalty rates can produce very different financial outcomes depending on whether that rate is fixed or tied to revenue. To see the initial franchise investment details, review Item 7 of the FDD.
Understanding the difference isn’t about picking a side. It’s about knowing what question to ask when you’re evaluating any franchise opportunity, including this one. A royalty structure isn’t a hidden trap — it’s a mechanism, and mechanisms behave predictably once you understand how they’re built.
This article walks through how percentage-based, flat-fee, and hybrid royalty models actually work, what each one protects against and exposes you to, and how to evaluate whichever structure you’re looking at.
What a Royalty Fee Actually Pays For
A royalty is the ongoing fee franchisees pay for continued access to the brand, systems, and support — it isn’t a one-time cost like the franchise fee. It typically funds things like ongoing training and coaching, technology platform maintenance and development, brand development, and field support for franchisees. The franchise fee gets you in the door; the royalty keeps the system running and improving for as long as you’re part of it. Most franchise systems also separate the royalty from a marketing fund contribution, which is a smaller, distinct percentage that funds brand-level marketing assets rather than day-to-day support.
Percentage-of-Revenue Royalties: How They Work
A percentage royalty charges a fixed percentage of your gross revenue, so the dollar amount you pay moves directly with how much your business brings in. Gross revenue means total revenue before any expenses are deducted — before payroll, before overhead, before you pay yourself. According to FRANdata and BizBuySell’s 2024 analysis, the median franchise royalty fee across brands sits at 5% of gross sales, with a typical range of about 3% to 13% depending on industry. More broadly, franchise systems tend to cluster between 4% and 8%, with a system-wide median around 6%, according to FRANdata’s royalty data cited in IFA’s 2026 Franchising Economic Outlook. The core trade-off: your royalty payment shrinks in a slow month and grows in a strong one, which means the fee tracks your reality instead of sitting fixed regardless of performance.
Flat-Fee Royalties: How They Work
A flat-fee royalty charges the same dollar amount every period, regardless of how much revenue the business generates that month. The appeal is predictability — you can budget with certainty, because the number never moves. But that predictability cuts both ways. In a slow month, a flat fee doesn’t ease up: if revenue drops and the fee stays fixed, the effective percentage of revenue you’re paying spikes, sometimes into double digits. Flat fees also remove some of the franchisor’s built-in incentive to help you grow, since their revenue from you doesn’t increase when yours does.
Hybrid Models: Splitting the Difference
A hybrid structure combines a lower flat fee with a smaller percentage above a defined revenue threshold, aiming to capture some predictability without fully decoupling the fee from performance. A typical example might be a flat base fee plus a small percentage on revenue above a set monthly amount. Hybrids can work well for franchise systems with wide revenue variability across locations, but they add a layer of complexity to your monthly math that pure percentage or pure flat models don’t have.
Why Percentage Models Usually Align Incentives Better
A percentage-of-revenue structure ties the franchisor’s success directly to yours, which is the strongest argument in its favor. When your royalty grows only as your revenue grows, the franchisor is financially motivated to help you generate more business, not just collect a fixed check regardless of how you’re doing. It also protects you in a slow season — a new franchisee ramping up, or an established one hitting a rough quarter, pays less in absolute dollars exactly when they can least afford a fixed cost. This is why the percentage model is the industry default rather than the exception.
How to Evaluate Any Royalty Structure Before You Sign
The royalty percentage or flat fee is only one part of a larger cost picture, and evaluating it in isolation is a mistake. Before you sign anything, look at the full fee stack together:
- The royalty rate or flat amount, and whether it’s calculated on gross or net revenue
- The marketing fund contribution, which is separate from the royalty
- Any technology or software platform fees
- How and when fees are paid — monthly is standard, but confirm it
- What the royalty specifically funds, and whether that support is documented
For RedKnight specifically, any ongoing fees are disclosed in Item 6 of the Franchise Disclosure Document, as required by FTC rules — it’s not published in marketing materials, and any franchise that gives you a firm number before you’ve reviewed the FDD deserves a second look.
Ready to Review the Full Fee Structure?
The only way to evaluate a royalty structure honestly is against the complete numbers, not a summary. Contact RedKnight Franchising to request the FDD, review Item 6 and Item 7 in full, and see exactly what the FDD discloses about fees alongside the $9,900 franchise fee.
If this sounds like the kind of business you want to build, the next step is simple: inquire about RedKnight franchise ownership and we’ll walk you through what it actually takes.