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SBA loans vs. ROBS program financing… It’s a tough choice! Explore the option that makes the most sense for YOU in our latest article.
One of the most common questions that I get asked as a franchise coach? How can I afford a franchise? Nobody is expecting you to completely cover this investment out of pocket (although paying for your franchise cash is certainly a possibility). For those who need them, many franchise funding options are available. Today, we are going to talk about two of the most popular.
When prospective franchise owners evaluate funding options, two of the most common structures are SBA 7(a) loans and ROBS (Rollovers as Business Start-ups) using retirement funds. Each approach can work well depending on the individual’s financial situation, risk tolerance, and long-term goals.
Now, let’s take a closer look at these two options. This clear breakdown will compare structure, benefits, risks, and long-term implications so that you can feel confident in your path forward toward owning a franchise.
SBA (7a) Loan vs. ROBS (401k Rollover): What Franchise Buyers Should Know
If you are looking to buy a franchise, understanding the funding options behind franchise opportunities is a crucial part of the process. Here at The Franchise Fit Company, we take franchise education seriously. We want to help you build deep knowledge of your options so that you can move forward feeling empowered, confident, and ready to take on franchise ownership like a boss. Let’s start with the SBA (Small Business Administration) loan…
Fit Tip: Check out our webinar on SBA loans to learn more about this funding option in a video format.
1. SBA 7(a) Loan
The 7(a) loan program is the Small Business Administration’s primary business loan program focused on providing financial assistance to small businesses – yes, you read that right! Franchises are small businesses, too! Here’s how it works…
Structure
The SBA 7(a) loan is the most common financing vehicle used in franchising.
How it works:
- First, the borrower applies through an SBA-approved lender (bank or non-bank lender).
- The lender issues the loan, and the U.S. Small Business Administration guarantees a portion of the loan (typically 50% to 75%).
- The borrower receives capital, which can be used for for:
- Franchise fees
- Buildout
- Equipment
- Working capital
- Franchise fees
- The business repays the loan monthly with interest.
Those are the basic steps to acquiring and repaying a Small Business Administration loan. HEre are some other fasts facts you need to know about the typical SBA franchise loan structure:
| Component | Typical Range |
| Loan size | Up to $5 million |
| Down payment | ~10–30% |
| Term | Up to 10 years (business) |
| Interest | Prime + margin |
| Personal guarantee | Required |
Benefits of SBA Financing
Leverage your capital
Instead of using all personal funds, the SBA allows business owners to invest a portion (usually ~20%) and borrow the rest. This is advantageous for those who are not particularly liquid or who have less readily available cash to put down.
Preserves retirement accounts
Your 401(k) remains invested and growing for retirement, as opposed to being used to open your business through an option like ROBS.
Builds business credit history
With an SBA loan, you will be able to build a strong credit history for your business.
Predictable monthly payments
You will have an understanding of the loan term and the payment you owe each month before you sign anything. This helps you avoid unexpected costs.
Lower interest vs. many alternative lending options
As the SBA 7(a) loan is a government-backed program, you will be able to access competitive interest rates that you may not see from competitors.
Considerations & Risk
Personal Guarantee
The borrower is personally responsible for repayment.
Collateral Requirements
Homes, retirement accounts, or other assets may be pledged depending on lender policies.
Debt Service Pressure
Monthly loan payments begin quickly and can impact early cash flow.
Approval Process
SBA loans require documentation and underwriting and can take 30–90 days to complete.
Long-Term Implications
Taking out an SBA 7(a) loan has long-term implications both positive and negative for future franchise owners.
- Builds long-term credit and borrowing capability
- Interest expense reduces taxable income
- Requires stable cash flow to service debt
- Personal liability exists if the business fails
2. ROBS (Rollovers as Business Start-ups)
Now that you have a better understanding of the SBA loan option, let’s turn our attention to ROBS. This acronym stands for Rollovers as Business Start-ups, and it is a little-known franchise funding option that might be just right for your needs.
Remember, even though the ROBS program uses your retirement funds, that is not a red flag! Some people are scared off by the prospect of dipping into their retirement savings, and that is totally understandable. This option may not be for everyone. Other people, however, buying a franchise as an excellent way to build their retirement funds even further and actually use that money to generate wealth that will support their family for years. Here’s a little more about the ROBS program…
Structure
A ROBS allows someone to use retirement funds (typically from a 401k or IRA) to fund a business without paying early withdrawal penalties or taxes.
The process:
- A new C-Corporation is created
- A new 401(k) plan is established within that corporation
- Your existing retirement funds are rolled into the new 401(k)
- The 401(k) purchases stock in the new company
- The company now has cash to fund the business
Essentially, your retirement funds become equity in your company. Sounds pretty good, doesn’t it?
Benefits of a ROBS
No debt payments
There are no monthly loan payments, which improves early cash flow.
No interest costs
With the ROBS program, you are not borrowing money – you are using your own! Therefore, you do not have to pay for interest, saving you lots of money in the long term.
No personal guarantee
Again, not borrowing money comes in handy here. There is no need to leverage your assets or cough up collateral in order to use your own money to buy a franchise.
Faster funding vs. SBA
Compared with SBA 7(a) loans, it typically takes less time to set up a rollover through the ROBS program.
Can be combined with SBA financing
Many franchise owners use a ROBS as the down payment for an SBA loan. Sound interesting to you? We can talk more about the financial side of franchise ownership in our free, one-on-one consultation.
Considerations & Risks
Retirement Risk
With ROBS, your retirement savings are tied directly to the performance of the franchise business. While some people appreciate taking control of their retirement earnings, others find this too risky. Your own individual risk tolerance is up to you.
Must Operate as a C-Corporation
ROBS structures require a corporate structure, which may have tax implications.
Compliance Requirements
The retirement plan must follow IRS and ERISA regulations.
Administrative Costs
It does cost money to set up a rollover through the ROBS program. Here are some ballpark figures you can expect to see…
| Fee Type | Typical Range |
| Setup | $4,000 – $6,000 |
| Monthly administration | $100 – $200 |
Long-Term Implications
There are both positives and negatives to using a ROBS rollover to fund your franchise. Here are some key points to consider when choosing the right franchise funding option for you:
- Your retirement investment is directly tied to business success
- If the business fails, the retirement funds invested may be lost
- Potential upside if the business grows in value
- Requires ongoing retirement plan administration
SBA vs ROBS: Side-by-Side Comparison
Find some more information about an SBA loan vs. a ROBS program rollover right here…
| Factor | SBA Loan | ROBS |
| Debt | Yes | No |
| Monthly payments | Yes | No |
| Interest | Yes | No |
| Personal guarantee | Yes | No |
| Risk to retirement funds | No | Yes |
| Business structure required | Any | C-Corporation |
| Approval process | Bank underwriting | Setup through ROBS provider |
| Tax advantages | Interest deductible | None specific |
| Cash flow pressure | Higher | Lower |
Hybrid Strategy (Common in Franchising)
Many franchise owners use both an SBA loan and a ROBS rollover. Here is an example of what that might look like…
- The franchisee uses $100K from ROBS (retirement rollover) to get started
- They also take out a $400K SBA loan
So, why would you choose this hybrid approach? Benefits of the hybrid approach include…
- Reduces SBA down payment requirements
- Limits personal debt exposure
- Preserves some retirement funds
I like to say that this hybrid structure offers you the best of both worlds – mitigating risks from either side!
Strategic Considerations for Prospective Business Owners
When deciding between SBA or ROBS, here are some key questions to ask yourself:
1. Risk tolerance
Are you comfortable tying your retirement savings to the franchise business?
2. Cash flow expectations
Will the franchise business generate revenue quickly enough to support loan payments?
3. Long-term financial planning
How important is preserving your retirement investments?
4. Exit strategy
How will the business sale or retirement transition impact your financial future?
Final Thoughts on Franchise Funding Options
Both SBA loans and ROBS structures are widely used in franchising, but they lend themselves to different financial strategies:
- SBA loans leverage capital but create debt obligations.
- ROBS eliminates debt but increases personal investment risk.
The best option often depends on financial profile, risk tolerance, and long-term wealth planning. We will talk through all of your options related to owning a franchise during our series of coaching meetings.
Schedule a free meeting right here. I can’t wait to chat with you and discuss franchise opportunities, building your business, and starting a new chapter in your career. Working with me is always 100% free, 100% of the time. Talk to you soon!
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Have you ever wondered why franchise owners have to pay royalty fees? If so, you are not alone. Royalty fees are one of the first numbers that will probably catch your eye when you start looking into owning a franchise – and sometimes, they might seem unfair and frustrating.
Understanding franchise royalties is an important step of the process when opening a franchise and in the years that come after your grand opening. Today, we are going to break down the ins and outs of royalty fees so that you feel confident in what you’re paying for – and why.
Why Franchise Owners Pay Royalty Fees and What Other Ongoing Fees to Expect
If you’re exploring franchise ownership, one of the first numbers that jumps off the page in the FDD is this: Royalties.
You are going to see that royalties eat up 5%… 6%… even 8% of gross revenue.
And the natural reaction is: “Why am I paying someone a percentage of my revenue forever?”
That is a fair question when it comes to owning a franchise.
Let’s break it down clearly, covering what royalties are, why they exist, and what other recurring fees you should understand before signing a franchise agreement.
What Are Royalties?
A royalty is an ongoing fee that a franchise owner pays to the franchisor. You will typically see royalty fees structured in one of the following ways:
- A percentage of gross revenue (most common)
- A flat monthly fee
- A tiered structure (much less common).
Most systems fall in the 4% to 8% range of gross revenue, though some go higher depending on industry and brand strength.
Fit Tip: Remember, royalty fees are usually based on top-line revenue, not profit. This is an important distinction to keep in mind when you are opening a franchise and budgeting to compensate yourself and your employees.
Why Do Franchise Owners Pay Royalty Fees?
Royalties are not just a “brand tax.” They fund the infrastructure that supports the entire franchise system.
We have talked a lot on the blog about the difference between starting a business from scratch, entrepreneurship through acquisition (ETA), and franchise ownership. Franchise royalties pay for a lot of those differences. Here’s what they typically cover…
1. Branding and Intellectual Property
You are licensing a lot from the franchise, including:
- The brand name
- The trademarks
- The operating system
- The playbook
That brand equity did not appear overnight. Royalties support ongoing brand development.
2. Ongoing Training and Support
When you are opening a franchise, you want to invest in a strong system. Strong systems provide:
- Field support
- Coaching
- Operational guidance
- Technology upgrades
- System refinements
Royalties fund the teams that make that level of support possible.
3. Research and Development
Markets change. Consumer behavior shifts. Technology evolves. Royalties help the franchisor ensure that they stay with the times, allowing them to…
- Improve processes
- Enhance marketing systems
- Develop new products/services
- Stay competitive
A healthy system reinvests in innovation, and that is part of what franchise royalties fund.
4. System-Wide Stability
A franchise system only works if the brand remains strong across locations. Franchise royalties allow the franchisor to:
- Enforce standards
- Maintain compliance
- Protect the integrity of the network
Without recurring revenue, a franchisor cannot sustain long-term infrastructure. You benefit when all of the brands in your system are doing well, and royalties help maintain that system-wide stability and a reputation for excellence.
But Let’s Be Honest…
Royalties reduce your margin. You are not keeping 100% of your revenue like an independent operator would.
The question becomes: Is the system support worth the percentage?
That’s a question of business analysis – not just an emotional reaction to a fee.
Now, as an independent operator, you would need to invest in infrastructure to run your business. The offset is finding vendors, marketing strategies, brand, operations – and of course, the process of trial and error. For many, the cost of royalties takes away that headache.
Franchise royalties pay for you to be part of a system where the trial and error is done for you. Vendors are sourced. Marketing strategies are nailed down. You are buying into a solid, reliable, reputable brand – and that benefits your bottom line.
Other Recurring Franchise Fees You May See
Royalties are just one part of the equation. Do not forget about some other common ongoing franchise fees disclosed in the FDD:
1. Brand Fund / Marketing Fund Contribution
This typically amounts to between 1% and 4% of gross revenue. It goes into a national or system-wide marketing fund used for:
- Digital advertising
- Brand campaigns
- Creative development
- SEO
- Website management
- PR initiatives
Important distinction: This is separate from what you spend on local marketing in your territory. It is used for the brand as a whole, and the franchisor decides specifically what to spend it on.
2. Local Advertising Requirements
Some systems require additional franchise fee spend for local advertising, such as…
- A minimum monthly ad spend
- A percentage allocated locally
- Participation in co-op marketing groups
Even if it is not required by your franchise brand, local marketing is essential, both when you are first opening a franchise and in the years that follow.
3. Technology Fees
Franchise fees for technology may include:
- CRM systems
- POS software
- Reporting platforms
- Scheduling systems
- Website hosting
You will often see technology fees structures as either a flat monthly fee or a per-location tech fee. It all depends on your franchise system.
4. Renewal Fees
When your initial term ends (often after 10 years), you may pay:
- A renewal fee
- A percentage of the then-current franchise fee
Paying these fees essentially re-ups your license to use the franchise’s branding and continue operating under their banner. The renewal fee is usually significantly less than the franchise fee you will pay when you are first opening a franchise.
5. Call Center
If your franchise system offers a call center for inbound leads, scheduling, etc., you might have to pay for that service. In some cases, it may be optional – in others, it may be required. Again, it all depends on the brand. Either way, this is usually assessed as a flat monthly fee.
6. Transfer Fees
If you sell your franchise, the franchisor typically charges a transfer fee, generally assessed between 25% and 50% of the current franchise fee at the time of transfer.
Fit Tip: Getting overwhelmed with all of these fees? Remember, they will be outlined clearly in your Franchise Disclosure Document (FDD).
7. Audit or Late Fees
There may be penalties or interest assessed from the franchisor if one of the following scenarios occur:
- Reports are late
- Royalties are unpaid
- An audit finds underreporting
How to Evaluate Franchise Royalties the Right Way
Here’s what I tell my clients: Do not evaluate royalties in isolation.
Instead, ask thoughtful questions:
- What does this percentage buy me?
- Does the support match the fee?
- Are franchisees satisfied with the value received?
- Is the brand investing back into growth?
- Does the financial model still work after royalties?
A 6% royalty in a high-margin, well-supported system may be far more attractive than a 3% royalty in a weak one. Lower is not automatically better – you get what you pay for.
A Common Misconception About Franchise Royalties
Many clients will say something like this before opening a franchise: “Once I’m up and running, what does the franchisor really do?”
If the answer is “not much,” that’s a red flag.
Healthy franchise systems are actively engaged, providing services like:
- Coaching performance
- Refining strategy
- Managing brand consistency
- Improving technology
- Protecting the network
- Advising your on growth/scaling strategy for long-term success
Royalties should feel like fuel for growth – not dead weight that’s eating away at your margins with no benefit to you as an owner.
Final FranFit Thoughts on Royalty Fees
Royalties are the price of leveraging:
- An established brand
- A proven system
- Ongoing support
- A network of peers
You are not paying to “rent a logo.” You are buying into an ecosystem.
The real question is not: “Why do I have to pay royalties?”
It is: “Does this system generate more value than it costs me?”
That’s where smart diligence comes in. If you’re evaluating a specific brand and want help modeling what royalties actually mean for your take-home income, that’s a conversation worth having before you sign.
Start Your Journey to Owning a Franchise Today
Are you ready to explore the ins and outs of opening a franchise? I’m ready to help! At The Franchise Fit Company, we are not selling anything. We are simply helping you navigate the process of opening a franchise and reducing the headaches you experience along the way. We help with everything from initially brand matching to FDD guidance to the validation process – and everything in between. The best franchise is the one that FITS you.
Schedule a free meeting right here. I can’t wait to chat with you and discuss franchise opportunities, building your business, and starting a new chapter in your career. Working with me is always 100% free, 100% of the time. Talk to you soon!
