Franchising is a popular business model which allows entrepreneurs to start and operate their businesses using an established brand and business system. However, several myths and misconceptions surrounding franchise fees and royalties can make it difficult for entrepreneurs to understand the actual costs and benefits of franchising.
We'll try and debunk common myths and misconceptions about franchise fees and royalties. We will explain the purpose and benefits of franchise fees and royalties and provide insights into how they are determined and used. By the end of this post, readers will better understand franchise fees and royalties and their important role in the franchising industry.
What are Franchise Fees and Royalties?
Franchise fees and royalties are fees that are associated with franchising. Franchise fees are one-time payments made by the franchisee to the franchisor, while royalties are ongoing payments made over the term of the franchise agreement. Both fees are paid in exchange for the right to use the brand name as well as ongoing support and services provided by the franchisor.
Common Franchise Fees and Royalties Myths
Here are a few common myths about franchise fees and royalties we will debunk today. We hope this will help you get into the business with a clearer mind.
1- It's Too Expensive
One of the most common myths about starting a franchise is that it's too expensive. The truth is there are a ton of franchises that aren't very expensive. Most franchises can cost between $10,000 to $50,000. This is a one-time fee, and apart from this, there's only the royalty you need to pay each month based on the final agreement. Apart from this, the overhead expenses of the franchise and investments are something you need to handle based on your budget and capability. You can pick a franchise based on your budget and preference, start small and expand as you grow.
2- Franchisors Only Focus on Money
That's what everyone wants, after all. If your franchisor makes more money because you're doing more business, there's no reason to be upset about it. Besides profit sharing, franchising fees and royalties are something you and the franchisor need to agree on at the time of the agreement being put in place.
3- Franchise Fees Are Unnecessary and Unfair
The belief that franchise fees are unnecessary and unfair is a common myth based on something other than a proper understanding of the purpose and benefits of franchise fees.
Franchise fees are not unfair, as they are a standard part of the franchising model and are disclosed upfront in the franchise agreement. Franchisees are aware of the franchise fees they will be required to pay before they sign the agreement, and they have the opportunity to review and negotiate the terms of the agreement before signing.
4- Franchise Fees Are Too High
Franchise fees are often a topic of controversy in the franchising industry. Some people believe they are too high and unfair, while others argue they are necessary to maintain the franchise system. In reality, franchise fees are not too high and are essential to the franchising model.
Firstly, it is essential to understand what franchise fees are and what they cover. Franchise fees are one-time payments that franchisees make to the franchisor when they sign a franchise agreement. These fees cover the cost of the training and support. In most cases, franchise fees are a small percentage of the total investment required to start a franchise.
Franchise fees are not arbitrary and are determined based on several factors, including the size and popularity of the franchise system, the level of support provided by the franchisor, and the cost of developing and maintaining the franchise system.
5- Royalties Are a Waste of Money
Franchise royalties are not a waste of money, as they provide several benefits to franchisees. First, royalties ensure franchisees receive ongoing support and training from the franchisor. This support can include assistance with marketing and advertising, product development, and operational issues. Ongoing support from the franchisor can help franchisees improve their business operations and increase their profitability.
Also, royalties give franchisees the right to use the franchisor's trademarks and systems. This gives franchisees a recognisable brand that can attract customers and increase sales. The franchisor's systems can also help franchisees streamline their operations and improve efficiency, increasing profitability.
6- Franchise Fees and Royalties Are the Same Things
The belief that franchise fees and royalties are the same is a myth in the franchising industry. However, this myth is inaccurate, as franchise fees and royalties serve different purposes and are charged at different times for different purposes.
Franchise fees are one-time payments made by franchisees when signing a franchise agreement. On the other hand, royalties are ongoing fees that franchisees pay to the franchisor based on a percentage of their gross sales. These fees cover continuing support and training provided by the franchisor and the use of the franchisor's trademarks and systems. Royalties are typically charged regularly, such as monthly or quarterly, and are paid throughout the franchise agreement.
Examples of How Franchise Fees and Royalties Really Work
When you plan to start a franchise, you need to put some money upfront, which is called a franchise fee. This amount varies based on the kind of franchise you pick. For example, if you opt-in for a smaller, less popular franchise, you pay a lesser amount as compared to one that is popular.
For example, franchises like 7/11 can charge as little as $10,000, while larger ones can charge up to $500,000. Remember that while there’s a huge price difference, franchises that charge higher fees will give you more bandwidth to get your business rolling.
Royalty fees can fluctuate based on the gross sales of the franchise. The ideal range is between 5% and 9%. While most times this fee is fixed, some franchises choose to fluctuate the percentage based on how the business grows. Both scenarios have their pros and cons. The royalty fee is often determined by factors such as labour, rent, cost of supply, and inventory.
Franchises Fees and Royalties: The Truth Revealed
Choosing the right franchise and coming up with the proper fee and royalty model is a necessary process. However, once you figure out what works for you, it becomes easy to move ahead with your business plan. We hope we've debunked some franchise myths and explained the fees and royalties and how your agreement plays an important role.
Shaun M Jooste, Point Franchise ©