The Truth About Royalty Fees: A Practical Guide for Future Franchisees in the Philippines
The Truth About Royalty Fees: A Practical Guide for Future Franchisees in the Philippines
If you've ever dreamed of running your own business without starting from scratch, franchising might just be your golden ticket. But before diving in, you’ll come across two important terms—franchise fees and royalty fees. These aren't just industry buzzwords; they’re the backbone of every franchising agreement. Especially in a thriving business landscape like the Philippines, understanding these concepts can make or break your investment.
In this detailed guide, we’re breaking down everything you need to know about royalty fees, how they’re structured, their role in the franchise ecosystem, and how brands like David’s Salon operate under this model. Whether you're eyeing a food cart in Manila or a salon in Cebu, this article will equip you with practical knowledge to navigate the local franchising scene like a pro.
What Are Royalty Fees?
At its core, a royalty fee is a recurring payment made by the franchisee to the franchisor. This fee is usually paid monthly and is calculated as a percentage of the franchisee’s gross sales—typically ranging from 3% to 10%. Some systems use a flat monthly fee or a hybrid model combining a percentage with a fixed minimum.
Beyond being just another line item on a financial report, royalty fees fund the essential components that keep a franchise network thriving:
Brand Use and Ongoing Rights – Franchisees pay to continue using the franchisor's trademark, branding, systems, and proprietary methods.
Training and Support – Ongoing training, access to business consultants, operational updates, and marketing guidance are often covered.
Marketing and Advertising – Some franchisors use royalty income to support national or regional campaigns, driving awareness and foot traffic.
Technology and Systems – Franchise systems invest in POS platforms, inventory software, and other tools to help franchisees operate more efficiently.
Franchise System Growth – Royalties also support product development, recruitment, and innovation that benefit the entire network.
Real-World Example
Let’s say you operate a café and earn ₱500,000 in a month. With a 5% royalty fee, you’ll pay ₱25,000 to the franchisor that month. This recurring fee ensures ongoing support, branding, training, and marketing assistance.
Royalties vs. Licensing
While both models involve payment for using intellectual property, franchising includes far more control and support. Licensing is typically hands-off. Franchising is an active partnership.
Royalties in Other Industries
Royalties aren’t unique to franchising—they’re used in music, publishing, and tech, where creators earn income when others use their intellectual property. In franchising, you’re paying for use of trade secrets, trademarks, and the business system.
Franchise Fees vs. Royalty Fees
These two terms are often confused:
Franchise Fee – A one-time, upfront payment to join the franchise. It covers onboarding, training, setup assistance, and sometimes equipment. Think of it as the entry fee to the business.
Royalty Fee – Ongoing monthly payments (percentage-based or fixed) to maintain your rights to operate under the brand and receive continuous support.
A simple analogy: The franchise fee is your ticket into a theme park. The royalty fee is what you pay to ride the attractions and keep the park running.
Budgeting for Both
Always factor both fees into your business plan. Franchisees who only account for the franchise fee often underestimate ongoing costs and suffer cash flow issues early on.
Types of Royalty Fee Structures
Percentage-Based Fees – Most common model; aligned with performance.
Fixed Fees – Same monthly payment regardless of sales; riskier for low-margin businesses.
Minimum Royalties – A base fee applied even if sales fall short; used in premium or stable franchises.
Each structure has pros and cons. Choose what fits your cash flow and business resilience.
Calculating ROI with Royalty Payments
When projecting returns, don’t forget to subtract royalty fees. If your monthly gross income is ₱300,000 and your royalty is 6%, that’s ₱18,000. Your ROI timeline depends on these recurring costs. Use tools like break-even analysis and maintain a buffer for slow periods.
Challenges Faced by Franchisees
High Operating Costs – Rent, staff, inventory, and royalties can cut deeply into profits.
Low-Revenue Months – Royalties are due even when profits dip. Choose a franchisor that offers empathy or flexibility.
Strict Franchisor Policies – You may feel limited if you're used to making independent business decisions. Some franchisees struggle with this lack of autonomy.
Common Misconceptions About Royalty Fees
“Hidden Charges” Myth – Royalties are usually transparent, but new franchisees may confuse them with separate costs like ad fund contributions or software fees.
“One-Time Payment” Fallacy – Royalty fees are ongoing. If you ignore them, your cash flow will suffer. Budget accordingly.
Meet Some of Our Trusted Brand Partners
At BFEX, we proudly support emerging and established franchises across industries:
Binalot – Eco-friendly, Filipino meals in banana leaves.
Informatics – Global IT training and education.
Chef’s Bowl & Rice – Affordable rice bowl business with high ROI potential.
Bambbi Fuentes Salon – Beauty and wellness backed by decades of expertise.
Gift Microfinance – Accessible funding for small entrepreneurs.
House of Lasagna – Comfort food favorite with a proven system.
Why Franchise with BFEX?
Easy to Start, Easy to Run – Proven business models and strong support.
Affordable, High-Earning Potential – Get in at a reasonable cost.
Trusted Brands – Strong, recognized names in food, beauty, and more.
Complete Support – From choosing a location to training and operations.
What’s in the Franchise Package?
Franchise Fee: Affordable entry with good value
Store Setup & Branding: Visually distinct and professional
Equipment & Inventory: Ready to operate from Day 1
Marketing Support: Nationwide and local campaigns
Operational Training: Intensive guidance and mentorship
Ongoing Support: You’re never alone on your journey
Send an Inquiry
Attend Franchise Orientation
Choose Your Location
Sign the Agreement
Train and Open Your Store
Financial Planning and Projections
Before signing anything, create detailed projections—monthly revenue, expenses, royalty fees. Use conservative figures and include a contingency buffer for emergencies. Franchisors can offer sample numbers, but do your due diligence.
A reserve fund covering three to six months of operations is wise, especially in your first year.
Final Thoughts
Royalty fees aren’t just a cost—they’re an investment in sustained success. When understood and planned for, they become a source of strength, funding everything that helps your business thrive.
With the right brand and support system, franchising can be one of the smartest ways to step into entrepreneurship in the Philippines. Contact us at The Business and Franchise Exchange - we've been supporting both emerging and established Filipino brands succeed in franchising.
