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How Royalties Fit into the Franchise Opportunity

When it comes to money, it’s best to have it all out in the open, so there are no surprises. And in terms of becoming of becoming a franchisee, that means full disclosure with a couple of different fees. First, there’s the one-time franchise fee that you’ll pay the franchisor. But then there’s the service or roylaty fee, which is the main way the franchisor makes money. You’ll have to pay it as long as you remain a franchisee. It may be as much as 20 percent of the sale, and it might be paid on either a weekly or monthly basis. To keep any part of it from being a bone of contention, however, it’s important that the terms be mutually understood and agreed upon.

Some companies offer lower royalty fees than others, but that doesn’t necessarily mean that they offer better opportunities. Remember the adage that you get what you pay for; the franchisor must show an ongoing interest in the development of the franchisee, or else the franchisee will be the one who suffers in the long run.

In most cases, royalty fees are based on sales in the week or month but not on the profit, which tends to favor the franchisor. If the royalty fee was based on profit, then the franchisor would have to keep an eye on the cost and sales of the franchisee, which would be been time-consuming and difficult. But from the point of view of the franchisee, the royalty fee eats up a good part of the profit he turns after deducting the cost of production. Hence, there should be a balanced royalty fee. The franchisor has the right to ask for it because it was responsible for creating a brand name of the product/concept. On the other hand, the franchisee should earn something from his business to get motivated. The royalty fee can be negotiated when term renewal time comes.

Want to learn more? Contact brandEXPANSION.