Which statement best describes what a royalty is?

A royalty is fundamentally a payment made by one party to another for the ongoing use of an asset, and in this context, it refers to fees associated with the continued use of intellectual property, trademarks, or other business resources. The correct choice describes a royalty as an ongoing fee based on revenue, which aligns with the typical structure of royalty agreements.

In business terms, royalties are commonly calculated as a percentage of sales or revenue generated by the use of the intellectual property or brand, making it an ongoing financial arrangement rather than a one-time payment. This model incentivizes the franchisor or owner of the intellectual property to support and promote the franchise or brand, as their earnings are directly tied to the success of the franchise’s operations.

Understanding why this definition is accurate helps clarify the nature of royalties in various business relationships, especially in franchises or licensing agreements, where the ongoing nature of the fee reflects the continuous value being derived from the brand or asset.