what is a royalty 
a royalty is a legally binding payment made to an individual or company for the ongoing use of their property including copyrighted works franchises and natural resources royalties can be collected for tangible and intangible assets an example of royalties would be payments received by musicians when their original songs are played on the radio or television used in movies performed at concerts bars and restaurants or consumed via streaming services in most cases royalties are revenue generators specifically designed to compensate the owners of songs or property when they license their assets for another party s use investopedia jessica olahunderstanding royaltiesroyalty payments typically constitute a percentage of the gross or net revenues obtained from the use of property however they can be negotiated on a case by case basis according to the wishes of both parties an inventor or original owner may choose to sell their product to a third party in exchange for royalties from the future revenues the product may generate for example computer manufacturers pay microsoft corporation royalties for the right to use its windows operating system in the computers they manufacture third parties pay authors musical artists and production professionals for using their produced copyrighted material television satellite companies pay royalty payments to air the most viewed stations nationwide in the oil and gas sectors companies pay landowners royalties for permission to extract natural resources from their covered property payment may be nonrenewable resource royalties patent royalties trademark royalties franchises copyrighted materials book publishing royalties music royalties and art royalties well known fashion designers can charge royalties to other companies for using their names and designs royalty agreements should benefit both the licensor the person receiving the royalty and the licensee the person paying the royalty for the licensor a royalty agreement to allow another company to use its product can allow them access to a new market for the licensee an agreement may give them access to products they could not access otherwise types of royaltiesroyalty payments may cover many different types of property some of the more common types of royalties special considerationsthe terms of royalty payments are laid out in a licensing agreement the licensing agreement defines the limits and restrictions of the royalties such as its geographic limitations the duration of the agreement and the type of products with particular royalty cuts licensing agreements are uniquely regulated if the resource owner is the government or if the license agreement is a private contract in many licensing agreements royalty rates are defined as a percentage of sales or a payment per unit rates may also be a factor of to accurately estimate royalty rates the transactions between the buying and selling parties must be willingly executed in other words the agreements must not be forced furthermore all royalty transactions must be conducted at arm s length meaning that both parties act independently and have no prior relationship according to upcounsel a nationwide legal services company the industries with the highest average royalty rates are software 9 6 energy and environment 8 and healthcare equipment and products 6 4 the industries with the lowest average royalty rates are automotive 3 3 aerospace 4 and chemicals 4 3 1examples of royaltiesbook writers typically receive a share of the proceeds from the sales of their books for instance an agreement between a publisher and writer might be that the author receives 15 on net sales of hardbacks and 7 5 on net sales of paperbacks franchises are another example where royalties are used for instance an individual can pay to open a restaurant franchise like mcdonald s a franchisee of the mcdonald s corporation has a typical initial down payment of 40 of the total for a new restaurant or 25 of the total for an existing one additionally an initial franchise fee of 45 000 is paid to the mcdonalds corporation after purchasing the franchise the owner must then make ongoing royalty payments of 4 5 of monthly sales and pay rent which is either a base amount or a percentage of monthly gross sales 2