Royalty

The Canadian Franchise Association describes a franchisee as paying a fee, typically an initial franchisee fee and ongoing royalties, for the right to use the franchisor’s trademarks and business system. A royalty is therefore the continuing part of what a franchisee pays. Ask about it when comparing what a location costs to run. What ongoing fees and royalties does a franchisee pay? goes further.

Where the law touches it

Ontario’s Arthur Wishart Act does not use the word royalty. Its definition of a franchise turns in part on a franchisee being required by contract or otherwise to make a payment or continuing payments, direct or indirect, to the franchisor or the franchisor’s associate. Each province’s Act has its own definition, so check the one that applies.

What to check

• What the agreement says the royalty is based on, and when it is due
• Whether the agreement a buyer would sign carries the same royalty terms as the seller’s
• Whether the seller’s records show royalties paid and nothing owing

BDC says that knowing both repayment and ongoing royalty or revenue sharing obligations is crucial. See also the advertising fund, a separate payment.