The first time most people see a royalty percentage in a franchise disclosure document, the reaction is predictable: you pay a percentage of everything you bring in, every month, indefinitely. It stings. That reaction makes sense when royalties are viewed as a recurring tax on your own hard work. The reframe that changes the calculation: royalties are ongoing access fees to infrastructure you could not build or maintain on your own. When the support is real, the percentage is worth every dollar.
Understanding royalties before you sign a franchise agreement is non-negotiable. They are one of your most significant ongoing financial commitments, they scale directly with your revenue, and they run for the full term of your agreement. This article covers how royalties work, what they fund, how to evaluate whether you are getting real value, and how to build them accurately into your financial projections.
What Royalties Are — and What They Are Not
Franchise royalties are recurring fees paid by franchisees to the franchisor, calculated as a percentage of revenue and paid on a regular schedule, usually monthly. They are the ongoing cost of operating under the franchisor’s brand, inside the franchisor’s systems, with access to the franchisor’s support structure.
Royalties are distinct from two other fee categories that often get conflated with them. The initial franchise fee is a one-time payment at signing for the right to enter the system. Advertising fund contributions go toward system-wide brand marketing. Royalties are specifically the ongoing cost of the franchisor relationship — the people, technology, and operational infrastructure that support your business after launch.
The ongoing nature is what distinguishes franchising from simply purchasing a business license. You are not buying something once and walking away. You are entering a structured, continuous relationship where the franchisor keeps delivering value and you keep compensating them for it.
How Royalty Structures Work
The most common royalty structure in franchising is a flat percentage of gross revenue — total revenue before any expenses are deducted. Royalty rates vary widely by industry and model, which is why the FDD is the place to check the actual structure. The specific structure and rate for RedKnight are disclosed in Item 6 of the FDD — review that document carefully and bring specific questions to the development team.
Some systems use tiered structures where the percentage decreases as revenue grows, creating a built-in reward for hitting higher milestones. Others use flat rates regardless of scale. Some systems calculate on gross revenue; others on net revenue after certain deductibles. Each approach has different cash flow implications, and understanding exactly how yours is calculated matters significantly for monthly planning.
One critical point many new franchisees miss: royalties are calculated on gross revenue, not on your profit. They are owed before you pay yourself, before you cover operating costs, before any other deduction. This is standard structure across most franchise systems, but it is one of the most common sources of financial surprise for new owners who did not model it correctly from day one.
What Your Royalties Actually Fund
A well-run franchisor invests royalty revenue into the infrastructure that makes franchisees more successful. This is the core value exchange: you pay a monthly percentage, and in return you get continuous access to systems, support, and brand equity that would cost far more to build independently.
What royalties typically support in a healthy franchise system:
Ongoing training and coaching — not just onboarding, but access to support teams, specialized advisors, and real help when you hit unexpected challenges
Technology platform maintenance — servers, security, feature development, and updates to the tools you depend on every day
System development — continuous refinement of what works, what does not, and how to sharpen the operational model
Brand development — efforts that elevate the overall brand so every franchisee benefits from increased awareness
Field support staff — the people who work directly with franchisees are compensated through royalty revenue
Quality assurance — maintaining consistent standards across the system, which protects your individual reputation alongside every other location’s
When royalties are being reinvested into these areas, the fee represents a genuine ongoing return. When they are not, you are paying overhead for someone else’s benefit.
How to Evaluate Whether the Value Is Real
Not all franchise systems deliver equal value for their royalty percentage. Some franchisors invest heavily in tools, training, and support that genuinely move franchisee performance. Others collect the revenue while providing minimal ongoing services. Your job before signing is to determine which kind of franchisor you are evaluating.
Ask these questions directly — of any franchisor you are evaluating and, in an established system, of the current franchisees whose contact information is listed in Item 20 of the FDD:
How responsive is the support team? Call the support line yourself and test it. Do advisors give real answers, or refer you back to the manual?
What ongoing training exists after launch? What is actually included versus what costs extra?
How often is the technology updated? Are new features being added, or has the platform been stagnant?
Has the system meaningfully improved in the last two to three years? Ask this question directly of franchisees.
Does a franchisee advisory council exist, and does it have real influence?
How do the rates compare to similar systems in the same industry? If the percentage is higher, what specifically justifies it?
The goal is not to find the lowest royalty rate. It is to find the system where the value delivered consistently exceeds what you pay.
Royalties in Your Financial Model
Treat royalties as a variable cost that scales directly with revenue, and build them into your projections from the very first month. Take your projected annual revenue, multiply it by the royalty rate in the FDD, and divide by twelve. That monthly figure is owed before any other expense is covered.
As your revenue grows, your royalty payments grow with it. That growth is a sign of success, not a penalty. But it does mean your margin structure needs to be healthy enough to support royalties, your own income goals, operating costs, and working capital at the same time. Model all of it together.
A useful stress test: run a scenario where your first-year revenue comes in at 70% of your projection. Can you still cover royalties, operating costs, and personal living expenses at that reduced level? If yes, you have built a model with real buffer. If no, you need either a larger capital reserve or more conservative revenue assumptions before you sign.
The Alignment Built Into the Structure
The best franchise systems create natural alignment between franchisor and franchisee incentives through the royalty structure itself. When the franchisor earns more as franchisees earn more, there is a genuine, ongoing reason for the franchisor to keep investing in support, technology, and systems. Their own financial success depends on yours.
A franchisor who extracts royalties while minimizing reinvestment is making a short-term choice that eventually collapses. Franchisees disengage or leave. Brand reputation erodes. New franchise sales slow. The model unravels. Franchisors who build for the long term structure royalties as a fair fee for genuine value and then deliver on that promise every single month.
The IFA’s 2025 Economic Outlook projects total franchise output exceeding $936.4 billion across 851,402 establishments. That scale exists because the royalty-for-value model works when it is executed well. The contrast between franchise termination rates below 5% and independent business failure rates near 50% within five years, per U.S. SBA data, is often attributed to structured ongoing support. RedKnight is a new system with no results of its own to point to.
Ready to Review RedKnight’s Royalty Structure?
The complete details of how RedKnight royalties are calculated and what they fund are disclosed in Item 6 of the FDD. Request it, read it carefully, and bring your specific questions directly to our development team. We will give you honest answers about what you pay and what you get in return. Visit redknightfranchising.com to connect with our franchise team and start the conversation.