The $100 Question

When evaluating a franchise, most buyers focus on one number: the royalty.

"The royalty is 6%."

So they think: the franchisor gets $6, I keep $94.

Not exactly.

That 6% royalty is often just the beginning. Once you add advertising contributions, technology fees, required local marketing, and vendor markups, the real cost of being part of the franchise system can look very different.

Here's a better question to ask:

For every $100 this business collects from a customer, where does the money actually go?


 

Start With $100

Forget annual revenue projections. Take the business down to one $100 sale and subtract everything you're required to pay as a franchisee.

Here's a hypothetical example:

A franchise advertised at 6% royalty may carry something closer to a $14 cost per $100 collected.

And that's before you run the business.


 

Build Your Own $100 Breakdown

Fill this out using the actual franchise you're considering.

CUSTOMER PAYS: $100

MONEY REMAINING: $100 − $__ = $__

Now estimate your operating expenses:

WHAT'S ACTUALLY LEFT?

$100 − $__ franchise costs − $__ operating costs = $__

That's the number worth understanding before you get excited about revenue projections.


 

Where Do You Find These Numbers?

Start with the Franchise Disclosure Document (FDD). Focus on:

• Item 5 — Initial fees
• Item 6 — Royalties, advertising contributions, technology fees, and other recurring costs
• Item 7 — Estimated initial investment
• Item 8 — Required suppliers and purchasing restrictions
• Item 11 — Advertising obligations, including required local spending

Note: The FTC advises that royalties may be based on a percentage of gross income — even when the franchisee is losing money.


 

Then Ask Franchisees

The FDD tells you what's possible. Existing franchisees tell you what it actually feels like.

Ask them:

"If a customer gives you $100, approximately how much is left after franchise fees and required expenses?"

"What expenses turned out to be higher than you expected?"

"As your revenue increased, did your profit margins get better — or worse?"

Don't only speak with franchisees the salesperson recommends. Talk to operators at different revenue levels and, if possible, people who have left the system.


 

One Important Distinction

There's a difference between money paid directly to the franchisor and money you're required to spend because you're a franchisee.

Both matter.

A required $2,000 monthly ad spend doesn't become irrelevant because the check doesn't go to the franchisor. Neither does mandatory software, a required vendor, or a forced equipment upgrade.

You're trying to understand the economics of owning the business — not just the royalty line.


 

The Bottom Line

Don't evaluate a franchise based on the royalty alone. Don't fall in love with revenue projections.

Instead, ask: "What happens to every $100?"

Follow the money. Figure out what's required. Figure out what's left.

Then decide whether you still like the business.



This resource is intended for general educational purposes and is not legal, financial, or investment advice. Franchise economics vary considerably. Review the Franchise Disclosure Document and franchise agreement carefully and consider consulting qualified legal and financial professionals before making an investment.

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