What Are Franchise Royalties & Franchise Fees?
Buying a Franchise
Once you have decided that buying a franchise is the right move for you, it’s time to take a closer look at all the costs that can add up before someone hands you the keys and says, “It’s all yours.” By knowing ahead of time how much you need to spend in order to start the business as well as keep it running, you will make a more informed decision as to which franchise offers you the best chance for success.
Among all the terms you are likely to encounter when reading through franchise offerings, two of the most important are “franchise fees” and “franchise royalties”. In simple terms, a franchise fee is the money you pay up front to the parent company in order to qualify as a franchisee. A franchise royalty is a monthly or annual payment to the parent company – once you are open for business – generally based upon gross sales or some other metric. But there is more to each than that.
A royalty is any kind of ongoing payment one makes to enjoy continuous and regular use of a product or service. In the world, nearly every corporation charges its some kind of royalty, usually computed on a monthly basis. Royalties go toward a number of things that benefit the franchise owner, whether directly or indirectly. These may include maintenance on and automatic upgrades of computer systems – cash handling, inventory control, etc. – ongoing training for you and your employees, system-wide marketing efforts to promote the brand on a regional or national level, and upkeep at the home office that allows them to serve all their quickly and efficiently.
How Much Are Royalties?
Royalties are almost always based upon the amount of gross sales your franchise does each month, although sometimes the amount can be calculated on projected or expected sales figures. Payments are made weekly, monthly or quarterly, depending upon the terms of your franchise agreement. While there is no such thing as a “typical” royalty, the average franchise royalty will run from between five and eight percent. Some more popular brands, and those that sell higher-ticket items, may levy a royalty that reaches ten percent. A few corporations offer a sliding scale that rewards franchisees for exceeding sales goals. Under these circumstances, you might pay eight percent on gross sales up to your monthly goal and only six or seven percent on anything exceeding that total. It’s important for the to keep very detailed records, and oftentimes the parent company will ask for your monthly reports to be certified by an outside accountant, just to make sure you’re not fudging the numbers. You would never do that, of course.
The Cost of Franchise Fees
The franchise fee is sort of like an initiation payment, the up-front check you write to become part of the parent company’s business family. Every franchisor charges such a fee; the amount will vary widely from one industry to another, and even from one brand to another within that industry. Price the fee too high, and you drive away prospective . Set the fee too low, and you fail to create a satisfactory barrier to entry. After all, you want to create some sense of exclusivity among your franchise owners. In round numbers, a franchise fee will generally range from $5,000 to $50,000 or $60,000. Few companies feel comfortable charging more, especially when taking into account all the other things a has to buy before the business is a “go” – buildings and/or vehicles, inventory, supplies, and so on.
Your Return on Franchise Fees
After forking over such a princely sum, you probably want to know what you just bought. Franchise fees cover a wide range of expenses, many of which are designed to help you open a successful business. These fees may cover management and employee training, plus employee and handbooks. For paying this fee, you may be promised exclusivity in a particular geographic area, either in perpetuity or for a specific number of years. Finally, paying a franchise fee gives you the right to display the corporate logo, use proprietary business methods or “secret recipes,” and take advantage of the high level of brand recognition that will drive business to your door.