Royalty is similar to rent. Both are expenses for using other people's property. While paying rent, you use their physical assets like building, machinery etc. While paying royalty, you use their name or their franchise.

While the Initial Franchise Fee can be seen as the upfront cost to join as a “member” of the franchise system, the royalty payments can be seen as the ongoing “membership fees” required to remain that membership.

These payments are collected by the franchisor to fund the franchisor entity’s actions, which include both corporate and franchise-related expenses. The ongoing royalty payments are how the franchisor makes its money, which it uses to support its franchisees and further build the business.