In the course of the franchise investigative process (and possibly sooner), you’ll be exposed to the term “royalties”. No, we’re not referring to the upcoming nuptials of Prince Harry and Meghan Markle, but rather an integral part of the franchise business model. In general business terms, royalties refer to ongoing or continued payments for the use of intellectual property. For instance, actors who appear in television commercials receive royalties each time the ad airs. Book authors are also common royalty recipients.
Within the confines of franchising’s business model, royalties are a calculated fee paid by franchisees to the brand for the continued use of its trademarked operation. These royalty payments are utilized to maintain the operating system of the brand, ensuring that the industry has recurring revenue and capital to continually fund the expansion and growth of both the franchisor and its franchisees.
So, next question—how much, right?
Royalty fees can often be a negotiable item (always inquire), but the usual payments range from between six and 10 percent of the franchisees gross sales totals. These can be calculated monthly or quarterly.
It’s important for all prospective franchisees to understand that regular royalty payments are not some form of a “kickback” to the brand. The combined royalty fees of all franchisees in a system can constitute a hefty sum for franchisors, however, that money is typically earmarked for spending on capitalized growth. What kind of growth? Many franchises use royalty fees to fund the latest technological advances for their business models. Others use the funds to expand outreach, such as advertising, marketing, and even public relations efforts. And many franchise brands are even able to expand training and support programs through the use of combined royalty payments from its franchisees.
Perhaps one of the most promising benefits of combined royalty payment fund usage is in the effort to expand the brand’s footprint. Over time, royalty payments allow brands to extend their corporate reach in showcasing its products and services to new territories, regions and sometimes even other countries.
How do payments work?
It should be noted that a franchisor’s royalty fee payments can be set up in numerous ways. Some royalty payments are fixed and some are factored on a sliding economic scale. And in some cases, there aren’t any royalty fees at all—or they can be waived for a set amount of time. One thing is for sure—franchise brands put a lot of thought into setting up their royalty payment systems. The bottom line is this: franchisors calculate royalty payments based on the unit economics of their business models. Everything is factored in, including product/service costs, rent, overhead, and labor. In almost every case, the level of royalty payments due to the brand will allow both the franchisee and franchisor to make a profit.
When you’re ready to begin your own entrepreneurial journey, expect to visit the topic of royalty payments with the franchise concepts you’re interested in. Do your own due diligence to find out what amount you’ll be responsible for, how often you’ll pay it and how the money will be used for the betterment of the franchise system as a whole.
Chances are, you’ll be satisfied with the answer.
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