Of all the costs associated with buying a franchise in Australia, royalties are the one most likely to cause ongoing financial stress. Not because the percentage sounds alarming — 6% or 8% feels manageable in the abstract — but because of how they interact with your actual profit margins in practice.
The gross revenue calculation
Franchise royalties in Australia are almost always calculated on gross revenue — the total amount your business takes in before any costs are deducted. This distinction is critically important and often misunderstood by prospective franchisees.
Here is a concrete example. Suppose your franchise generates $25,000 in weekly revenue and your royalty rate is 7%. Your weekly royalty payment is $1,750 — regardless of what your costs are, regardless of whether you are profitable, and regardless of what is happening to your business.
The profit margin problem
Now consider what a 7% royalty on gross revenue actually means as a percentage of profit. If your net profit margin is 15% — which is reasonable for a well-run small business — your weekly profit on $25,000 revenue is $3,750. Your royalty of $1,750 is consuming 47% of that profit. Nearly half of everything you earn, after covering all your costs, goes to the franchisor.
If your margin drops to 10% in a difficult month — as it will — your profit is $2,500 and your royalty is $1,750. You are left with $750 for the week. If your margin drops below 7%, you are paying royalties while operating at a loss.
The marketing levy compounds the problem
Add a 3% marketing levy to the 7% royalty and you are paying 10% of gross revenue to the franchisor in a typical Australian franchise arrangement. On our $25,000 weekly revenue example, that is $2,500 per week — $130,000 per year — going to a third party before you have paid yourself a salary.
What this means for your business decision
None of this means franchising is always a bad choice. Some franchise systems provide genuine value through brand recognition, marketing support and operational training that justifies the ongoing cost. But you should enter any franchise agreement with a clear-eyed understanding of exactly how much you will pay, in what circumstances, and what you will be left with.
The alternative — building an independent business with equivalent systems and structure — eliminates royalties entirely. Every dollar of profit belongs to you. The Franchise Alternative is a five-day program that helps you build that independent business , with no ongoing costs of any kind. Register your interest here.