Royalties come off the top line, and that is where the coverage goes.
In the worked example, the unit clears 2.07x coverage before franchise fees and only 1.07x after them. The fees take $94,000 a year out of a business that has to pay $93,744 in debt service.
Illustrative only: $1,100,000 sales, operating costs at 76% of sales before franchise fees, $585,000 loan at an assumed 10.25% over 10 years. The rate is an assumption for the example, not a quote. Your franchisor's Item 6 and Item 19 disclosures and your lender's terms replace every number here.
Run it with your brand's fee schedule and your own build-out budget.
Open the calculatorThe 10% is 10% of everything, not of the franchise fee.
Equity injection is measured against total project cost — franchise fee, build-out, equipment, inventory and working capital together. For a resale unit, a seller note can count toward the injection only if it is on full standby (no principal or interest) for the life of the SBA loan, and only up to half of the required amount. A new unit has no seller, so the full 10% comes from the buyer.
The working capital line is the one buyers cut to make the injection smaller, and it is the one that runs out first. A unit that opens under-capitalized misses its ramp, and the first missed payment is usually a working capital problem, not a sales problem. Fund the ramp the franchisor's Item 7 estimate describes, then test whether the deal still covers.
- Total project cost from the Item 7 categories
- SBA equity injection and the standby seller-note limit
- Loan sizing, payment and annual debt service
- Royalty, brand fund and fixed fees taken from sales
- Coverage after owner compensation
- Whether the brand is on the SBA Franchise Directory
- The lender's own coverage and liquidity requirements
- Sales projections — you own the assumptions
- Lease terms and personal guarantees
The calculator does the arithmetic. It doesn't predict how the unit will perform.
Franchise financing, briefly
For an SBA 7(a) loan, yes. SOP 50 10 8 reinstated the Franchise Directory, and lenders check the brand's listing before they underwrite. Confirm the listing before you sign the franchise agreement.
It is part of total project cost, so it can sit inside the loan. It also raises the base the 10% injection is measured against.
SBA sets a floor and lenders set their own minimum above it, which is usually the one that binds. Thresholds differ between new units, resales and expansion deals, so ask the lender for the number that applies to yours and enter it in the calculator.
From the franchisor's Franchise Disclosure Document — Item 5 for the initial fee, Item 6 for royalties and ongoing fees, Item 7 for the initial investment. Item 19, where the franchisor provides it, covers financial performance.