Written By: Khushboo Verma

Franchise businesses are often sold as a safer alternative to starting from scratch. You get a proven brand, operating systems, supply chains, and marketing support. In return, you pay for access to that ecosystem. This is where the franchise royalty comes in, and this is also where many deals quietly turn unfair.

In 2026, Indian franchising is bigger, faster, and more crowded than ever. With thousands of brands chasing expansion, royalty structures have become increasingly creative. Some are genuinely aligned with franchisee success. Others are designed to extract cash regardless of whether the outlet survives.

Understanding the difference between a fair and an exploitative franchise royalty is no longer optional. It directly decides whether you build a profitable business or spend years working to pay someone else's invoices.

What Exactly Is a Franchise Royalty?

A franchise royalty is a recurring fee paid by the franchisee to the franchisor for ongoing use of the brand, systems, intellectual property, and support. Unlike the one-time franchise fee paid at onboarding, this payment continues for the entire term of the agreement.

Most commonly, the franchise royalty is calculated as a percentage of gross sales. In some models, it is a fixed monthly amount. In others, it appears under multiple heads that together act like a royalty without being labelled as one.

The logic is simple: if the brand grows and the outlet performs well, both parties benefit. The problem starts when the royalty structure is disconnected from unit-level profitability.

The Most Common Franchise Royalty Structures in India

Before judging whether a franchise royalty is fair, you need to understand the formats in use today.

Percentage-Based Royalty on Gross Sales

This is the most widely used model across food, retail, salons, education, and fitness.

Typical range in 2026:

• Food and beverage: 4% to 8% of gross sales
• Retail: 4% to 12% of gross sales
• Fitness and wellness: 5% to 10% of gross sales
• Premium international brands: up to 10% in some cases

What matters most is that this percentage applies to total revenue, not what you actually take home. Even if your outlet is loss-making, the royalty is still payable.

When used responsibly, this model works because the franchisor earns more only when the franchisee sells more. When abused, it becomes a fixed drain on cash flow.

Fixed Monthly Franchise Royalty

Some brands charge a flat monthly fee regardless of turnover.

Typical range:

• ₹10,000 to ₹50,000 per month for small formats
• ₹1 lakh or more for large-format or premium brands

This model is often marketed as "simpler" or "predictable," but it carries hidden risk. During slow months or ramp-up phases, the royalty remains unchanged while revenue fluctuates.

A fixed franchise royalty can be fair only if it is modest and supported by strong operational backing.

Hybrid Royalty Models

Hybrid models combine a lower percentage royalty with fixed fees under different heads. For example:

• 3% royalty on sales
• Plus 2% national marketing contribution
• Plus mandatory software or technology fees

On paper, each fee looks reasonable. When you add everything together, your actual monthly outgo can easily reach double digits.

This structure is increasingly common in 2026 and is where many investors get trapped by underestimating total outgo.

What a Fair Franchise Royalty Looks Like

A fair franchise royalty has three defining characteristics: alignment, transparency, and proportional value.

Alignment With Franchisee Revenue

The most important test is whether the franchisor earns only when the franchisee earns. Percentage-based royalties generally pass this test better than fixed fees.

A fair franchise royalty adjusts naturally with business cycles. In weaker months, your burden reduces. In stronger months, the franchisor benefits alongside you.

If a brand insists on high fixed royalties early in the lifecycle, especially before breakeven, that is rarely aligned with franchisee success.

Clear Justification for the Royalty

A fair franchisor can clearly explain what the franchise royalty pays for:

• Ongoing training and audits
• Central marketing and brand campaigns
• Supply chain management
• Product development and menu updates
• Technology platforms and analytics

If the franchisor struggles to connect the royalty to tangible support, that is a red flag.*

Industry-Comparable Rates

Royalty benchmarks exist for every sector. If a brand charges significantly higher than comparable players without offering superior economics or brand pull, caution is warranted.

This table shows that most sectors operate within predictable royalty ranges. Anything significantly above these benchmarks without exceptional brand value should raise questions.

When Franchise Royalties Turn Exploitative

Exploitative franchise royalty structures rarely look dangerous upfront. They are designed to appear manageable on paper while becoming suffocating in real operations.

High Royalties Combined With Thin Margins

Some sectors already operate on tight margins. When a franchisor layers a 7% or 8% franchise royalty on top of high rent, manpower costs, and discounts, the franchisee becomes the shock absorber for every inefficiency.

If unit economics only work in best-case scenarios, the royalty is not fair. In retail where you might earn anywhere from 15% to 55% margin, paying 12% in royalties doesn't leave much room for error.

Royalty on Gross Sales With No Cost Control

A dangerous setup is when the franchisor controls pricing, discounts, suppliers, and promotions, but still charges a royalty on gross sales.

In such cases, franchisees have no control over margins but bear the full burden of royalty payments. This is structurally exploitative, even if legally sound.

Multiple Fees Disguised as Support Costs

One of the most common traps is splitting the franchise royalty into smaller components:

• Royalty fee
• Brand fee
• Technology fee
• Marketing fund contribution
• Mandatory procurement margins

Individually, each looks reasonable. Together, they can cripple cash flow. Investors often calculate only the headline royalty and ignore the cumulative impact.

Royalty Payable From Day One

Fair franchisors often provide a royalty holiday during the launch phase. Exploitative ones demand full royalty from the first billing day, even before stabilisation.

In early months, when sales are unpredictable and costs are high, this approach shifts all risk to the franchisee.

Sector-Wise Reality of Franchise Royalty in 2026

Different industries justify different royalty levels. Understanding this context is critical.

Food and QSR: High operational support, menu development, and brand marketing justify mid-range royalties. Current data shows that QSR royalties remain between 4% to 8%, with additional marketing fees of 1% to 5%. Brands charging more than 8% need solid delivery numbers to justify it.

Retail: Lower operational complexity means royalties should stay conservative. With royalties ranging from 4% to 12%, high royalties often signal over-expansion. If a retail brand charges more than 10%, they need to justify that premium with outstanding operational backing.

Education and services: Royalties should reflect curriculum updates and lead generation. Fixed royalties here are especially dangerous during seasonal dips. Expect most players to charge somewhere in the 5% to 8% range.

Fitness and wellness: With India's fitness industry projected to reach ₹18,000 crore by 2030, gym franchises charge royalties between 5% to 10%. Premium international brands charge up to 10%, while budget options stay around 6%. Higher rates are justified only when comprehensive training and technology are provided.

Healthcare and diagnostics: Lower royalties but higher compliance support are standard. Aggressive royalty demands in this space often erode trust.

How Investors Should Evaluate a Franchise Royalty Before Signing

Before committing capital, investors should stress-test the royalty structure, not just accept the brochure numbers.

Ask these questions:

• What is the total effective franchise royalty including all mandatory fees?
• Does the royalty change if sales fall?
• Are there minimum guaranteed payments?
• Is the royalty linked to net revenue or gross billing?
• How does this compare with top-performing outlets, not average projections?

Always run a conservative scenario. If the business struggles at 70% of projected sales, does the royalty still leave room to survive?

Why Some Franchisors Push Aggressive Royalties

Brands under pressure to grow fast often depend on franchise royalty income to fund their own operations. In such cases, expansion becomes a cash strategy rather than a partnership strategy.

Sustainable franchisors build revenue through brand equity, supply chain scale, and long-term outlet success. Unsustainable ones rely on monthly royalty collections to stay afloat.

Some brands offer zero-royalty models to attract franchisees quickly. While appealing, these often compensate through higher upfront fees or mandatory procurement at inflated margins.

The Long-Term Impact of an Unfair Franchise Royalty

An exploitative franchise royalty does not just reduce profits. It affects decision-making.

Franchisees start cutting corners on staff, hygiene, and customer experience to survive. This damages the brand, reduces repeat business, and eventually hurts everyone involved.

Most franchise failures in India are not due to lack of demand. They happen because the cost structure, led by an unfair franchise royalty, leaves no breathing room.

According to recent franchise industry reports, the average payback period for franchises ranges from 12 to 36 months. When royalty structures are unfair, this period extends significantly, sometimes never reaching profitability.

Red Flags to Watch For

Before signing any agreement, watch for these warning signs:

• Royalty rate significantly above industry average without clear justification
• No royalty holiday during launch phase
• Multiple fees that add up to more than 10% of gross sales
• Franchisor cannot explain specifically what the royalty funds
• No flexibility during seasonal downturns
• Minimum royalty guarantees regardless of sales performance
• Existing franchisees hesitant to discuss profitability

Final Thoughts: Choosing the Right Royalty Is Choosing the Right Partner

A franchise royalty is not just a fee. It is a reflection of how risk and reward are shared.

In 2026, smart investors are no longer asking only "How much royalty will I pay?" They are asking "Is this royalty designed to help me grow or to extract value regardless of outcome?"

A fair franchise royalty feels uncomfortable but manageable. An exploitative one feels manageable at first and unbearable later.

Before you sign any agreement, remember this: brands can be copied, menus can change, and locations can be replaced. But a bad royalty structure stays with you every single month.

Choosing wisely here often makes the difference between owning a business and renting one under someone else's logo.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.