Beyond the Binder: The Franchise Agreement Series Part 3

Fees Beyond the Franchise Fee

How Ongoing Monetization Is Built Into the Agreement Long After the Sale

When people talk about the cost of buying a franchise, the conversation usually begins and ends with the franchise fee.

That is the number displayed on marketing materials. It’s the number brokers emphasize and the number most prospective franchisees anchor to when deciding whether a franchise is affordable.

It is also one of the least important numbers in the entire financial relationship.

The franchise fee is the price of admission. But in a healthy franchise system, it is not supposed to be the business model.

In theory, franchisors are meant to keep their lights on through ongoing royalties generated by successful, profitable franchisees operating long term. That model aligns incentives. When franchisees win, the franchisor wins.

The cold reality is that many systems do not operate this way. In practice, a growing number of franchisors rely heavily on franchise fees to pay the bills, regardless of whether royalty revenue ever reaches a level that supports sustainable operations. When upfront sales become the primary source of cash flow, the pressure to sell franchises quietly replaces the pressure to build profitable franchisees.

That is where alignment breaks. And once that happens, ongoing monetization written into the agreement stops being about supporting the system and starts being about sustaining the franchisor, whether or not franchisees are thriving.

Royalties Are Only the Beginning

Most franchisees understand they will pay royalties. What many do not fully understand is how flexible and expansive royalty definitions often are.

Royalties are frequently calculated not on profit, but on gross sales or a broad definition of revenue that includes
• Discounts
• Coupons
• Third party delivery fees
• Online sales routed through the franchisor
• Products or services the franchisee did not directly price or control

This means franchisees pay royalties even when transactions are unprofitable. The franchisor earns when money moves through the system, not when franchisees succeed.

Advertising Funds That Are Not Marketing Accounts

Advertising and marketing fees are often framed as collective investments in brand growth. In reality, these funds are typically controlled entirely by the franchisor.

Franchise agreements routinely allow
• Use of funds for purposes other than direct advertising
• Administrative costs paid out of the fund
• No obligation to spend money in the franchisee’s local market
• No requirement that the fund actually increase sales

Many agreements explicitly state that franchisees have no ownership interest in advertising funds and no right to demand accountability for results.

What looks like pooled marketing support often functions more like another revenue and control mechanism.

Technology Fees and the Monetization of Mandatory Systems

One of the fastest growing categories of franchise fees is technology.

Franchisees are increasingly required to use franchisor designated software platforms for
• Point of sale
• Customer relationship management
• Scheduling
• Payroll
• Reporting
• Online ordering

The agreements often allow the franchisor to charge for these systems, mark them up, or earn revenue through affiliates and vendors. Even when technology improves efficiency, franchisees rarely control pricing or alternatives.

Technology is no longer just infrastructure. It is a profit center.

Vendor Rebates and the Invisible Revenue Stream

Item 8 of the FDD discloses whether franchisors receive rebates or commissions from suppliers. What the franchise agreement often reinforces is the franchisor’s unilateral authority to mandate suppliers while retaining any financial benefits associated with those relationships.

This means the franchisor can
• Require franchisees to purchase from designated vendors, often at inflated pricing
• Earn money on those purchases
• Change suppliers at will
• Keep rebate income without sharing it

In some systems, this revenue rivals or exceeds royalty income. Yet many franchisees never fully factor it into the franchisor’s incentives.

If the franchisor profits more from your purchasing than from your profitability, alignment disappears.

The Power of the Fee Add-On Clause

Perhaps the most dangerous fee-related provision in a franchise agreement is the clause that allows franchisors to introduce new fees.

Often buried deep in the contract is language allowing the franchisor to impose new charges for
• New services
• New programs
• System changes
• Brand initiatives
• Technology upgrades
• Training requirements

This means the fee structure you analyze before signing is rarely the fee structure you live with long term.

The financial relationship is dynamic in only one direction. It expands.

Why This Matters More Than the Franchise Fee Ever Will

The franchise fee is paid once. The ongoing monetization mechanisms operate for years.

Franchisees often spend more time negotiating the franchise fee than analyzing the provisions that determine how much they will pay over the next decade. That is backwards.

The true economic burden of a franchise is not the cost to enter. It is the cost to remain.

What Franchisees Should Be Asking Before They Sign

Before committing, franchisees should be asking
• What fees exist beyond royalties
• How broadly is revenue defined for royalty purposes
• Who controls advertising funds and how can they be used
• What technology is mandatory and who profits from it
• Does the franchisor receive vendor rebates
• Can new fees be introduced later

If the answer to any of these is vague or deferred to the operations manual, that is not a detail. That is a red flag.

The Structural Reality Behind the Fee Model

Franchise agreements are not just legal documents. They are financial engineering tools. They are designed to ensure that money flows upstream in multiple ways, not just through royalties. The longer the relationship lasts, the more opportunities exist for that flow to expand.

This does not mean franchising is inherently bad. It means franchisees must understand that they are entering a financial system that is structurally designed to monetize their operation long after the excitement of opening day fades.

In the next installment of Beyond the Binder, we will examine control without ownership and how franchisors maintain sweeping operational authority over businesses they do not own.

Before you sign, remember this. You are not just paying for the right to enter a system. You are agreeing to fund it, indefinitely, under rules you do not control.

The information provided in this article is for educational purposes and general public-interest reporting. It does not offer legal, financial, or investment advice. Franchise purchasers should consult qualified professionals before making decisions. Franchise Reality Check™ analyzes publicly available documents, including Franchise Disclosure Documents (FDDs), state regulatory filings, and court records. Under Oklahoma Statutes and applicable federal law, analysis of publicly filed franchise documents, commentary on matters of public concern, and reporting on franchise industry practices are protected forms of speech.