How Significant are Royalty Fees?

Franchising not only involves determination and sustainable but also involves capital investment. The capital involved is often split up catering to the various set up and franchisor’s agreement. One of these expenses typically involves a royalty fees, which is regularly paid to the franchisor. The amount varies and could be a fixed amount or based on percentage.

Royalty Fees

Franchising is an assured way of fulfilling your business dreams and comes with lots of conveniences which makes your journey less strenuous. However, this comes with a price. Royalties are necessary for franchisors to sustain and survive since royalties are often the only income source a franchisor has. The royalty enables the franchisor to make profit and work towards growing the system. In exchange for receiving a royalty, the franchisor creates, maintains and improves a business operating system designed to provide the franchisee with a structural advantage in the marketplace. A proven business operating system which systemically reduces a franchisee’s business risk is the most valuable quality of a franchise and an asset which is worth the pay. The payments are usually lower than upfront fees because they’re a continuous regular expense. A franchisee experiences daily sales as its main source of revenue. However, the regular monthly income that the franchisor earns is based on royalty payments from the many franchises he/ she own.

Types of Royalty Fees:

There are mostly two types of royalty fees, which are charged by the franchisors to keep their existence intact in lieu for providing a fail proof platform for the new comers and beginners.  The first type is a percentage based type royalty. It can be anywhere from one to 40 percentage of the gross sales but is often in the 5 to 7.5 percentage range. This kind of format is beneficial for both the parties in the long run and acts as a motivation to increase the sales.

The second type is the percentage based royalty fee. It refers to a fixed amount of money to be paid irrespective of the sales percentage. This kind of arrangement is unlike the percentage based format. The agreement may require you to pay a lower amount of money which could be altered with a change in the agreement. However, in most likelihood only the new franchisees would pay the revised amount, contrary to the older ones.

Significance:

Recurrent royalty fees are effective and necessary contributions to the entire organization. The payments are used to maintain the system and ensure that all avenues flow smoothly between the franchisor and franchisee. Royalty fees are typically paid to the franchisor to stay current on technological advances, as well as to enable the creation and marketing of fresh products and services. They also come handy to pay expenses that are incurred at the franchisor’s headquarters such as logistics requirements.  Royalty payments play a very significant role in enabling the franchise company to extend its products and services into other regions and possibly into other countries. As more creative advertising is launched, the organization’s brands become increasingly identifiable, so higher business and profits are ideally realized for both the franchisee and the franchisor.

Epilogue:

A common misconception and confusion which is bound to take place is, choosing an option with low royalty or high royalty fees. The most common pick is always a franchise with lower royalty fees. However, it is important to not make the decision with only the financial aspect in mind. One needs to research about the franchise and the probability of success in the long run. It is also pivotal to understand that the higher the royalty, the better facilities and stability is guaranteed to you. Weigh all the aspects before you may that big decision.

Karan Makan

Technology Engineer and Entrepreneur. Currently working with International Brands and helping them scale their products Globally through different ventures. He owns Multiple Food Brands and is on a continuous spree to acquire many more businesses in the coming years. With over 10 years of experience and strong background in Brand Acquisition, Karan Makan is soon poised to be a Brand in the coming years.