Royalty clause: sample for licences and franchises

Sample clause

Written for trade mark licence from The Ravens, a fictional football club, to Fowbrook Apparel, a fictional sportswear maker, for licensed merchandise.

Royalties. (a) Rate. The Licensee pays the Licensor a royalty of 8 per cent of Net Sales of Licensed Products. (b) Net Sales. Net Sales means the gross amount invoiced for Licensed Products, less GST, credits for returned goods and trade discounts shown on the invoice, but with no deduction for freight, commissions or bad debts. (c) Minimum. The Licensee pays a minimum royalty of $12,000 in the first Contract Year, credited against royalties earned that year. Any shortfall is paid within 30 days after the year ends. (d) Reports and payment. Within 20 days after each quarter, the Licensee sends a report of units sold, gross sales, deductions and Net Sales by product, with payment of the royalty. (e) Audit. The Licensor may audit the Licensee's records once a year on 10 business days' notice. If an underpayment of more than 5 per cent is found, the Licensee pays the cost of the audit.

Sample wording, not legal advice.

Variants

What to negotiate

• Argue the base, not just the rate

  An 8 per cent royalty on net sales after generous deductions can be worth less than 6 per cent on gross sales. Licensees want freight, commissions and bad debts deducted; owners want a narrow list. Defining Net Sales with a closed list of deductions, as the sample does, removes most later disputes.

• Minimums and performance

  A minimum royalty protects an owner that has granted exclusivity and cannot license anyone else. Licensees should ask for a ramp up in the first year, credit of the minimum against earned royalties, and a right to give up exclusivity rather than pay a minimum the market cannot support.

• Audit and the cost trigger

  Royalties depend on the licensee's own records, so the owner needs a right to audit. A common compromise limits audits to once a year on notice, and moves the audit cost to the licensee only if the underpayment found exceeds a threshold such as 5 per cent.

The risk of leaving it out

A licence or franchise without a clear royalty clause leaves the owner without a reliable income stream and with no right to check the licensee's figures. A vague base invites the licensee to deduct whatever it can, and the absence of a minimum lets an exclusive licensee sit on the rights while paying almost nothing.

Where royalties appear

Royalties are paid under trade mark licences, such as merchandise featuring a club's marks; copyright licences for music, books, images and software; patent licences for technology; and franchise agreements for the right to run a business under the franchisor's brand and system. The trade mark licence and franchise disclosure examples show the two common shapes: a percentage of the licensee's net sales with a yearly minimum, and a weekly percentage of the franchisee's gross sales with a separate marketing levy.

Registered rights and the licence

A trade mark registered with IP Australia gives the owner exclusive rights in Australia for the goods and services it covers, and the Trade Marks Act 1995 lets the owner authorise others to use it. Use by an authorised user under the owner's control counts as the owner's use, which keeps the registration safe from removal for non use. A royalty clause therefore sits beside quality control and approval clauses in a well drafted licence. Law checked on 21 October 2026. This page explains how the law works and is not legal advice.

GST and withholding

In Australia a royalty paid to a GST registered licensor is usually a taxable supply, so the clause should say whether the rate is GST exclusive and how GST is added. Royalties paid to overseas owners can attract withholding tax, which the licensee must deduct and pay to the tax office; the clause should say who bears it. Both points are best confirmed with an accountant before the first payment.

Where the clause sits in a generated document

Trade mark licences, franchise documents, music and photo licences carry royalty clauses. When asking the AI document generator for one, give the rate, the base and its deductions, the reporting period, the minimum, the audit right and the late payment rule, so each becomes its own numbered sub clause.

Documents that carry this clause

Trademark licence agreement with quality control and royaltiesA trademark licence lets someone else put your mark on their goods, and the clause that keeps it worth doing is quality control. This one licenses three registered marks from a football club to an apparel maker for three years, at 8 per cent of net wholesale sales with a rising minimum, and approval of every pre production sample in ten business days.Franchise agreement summary template, with every fee in one tableA prospect reading a franchise agreement for the first time wants one thing before the clauses: the total cost of being in this system for a year. This four page summary puts every payment in a single table, then shows what those percentages come to on the site forecast of $780,000, which is $76,260 a year or 9.8 per cent of gross sales.

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