Understanding the Ins and Outs of Franchise Royalty Fees

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How the franchise royalty fee works

The costs associated with franchising are many and various, though the rewards are, too. Costs and pricing structures vary considerably from franchise to franchise, depending on a variety of factors like size, location and brand recognisability. One of these costs? Franchise royalty fees.

Many different franchisors require franchisees to pay franchise royalty fees on a monthly or yearly basis. In this article, you’ll discover the ins and outs of franchise royalty fees, from how much they commonly cost to exactly what the franchisor uses that money for.

Six commonly asked questions about franchise royalty fees

Starting a franchise is an exciting and enjoyable process. It can also take a lot of hard work, research and communication. Before settling on a sector and investing in a franchise opportunity that feels right for you, you’ll need to take costs into full consideration. And not just the initial investment costs, either! Many franchisors charge franchisees certain ongoing fees, such as royalty fees, at different rates, amounts and intervals. Here are six commonly asked questions about franchise royalty fees...

What is a franchise royalty fee?

A royalty fee is a form of ongoing payment. The fee is not dissimilar to a membership, as you will need to pay it in order to remain a part of a franchise. Unlike the upfront costs of an initial investment, these fees will be paid once a month, or quarterly, or even yearly, depending on the preferences of your franchisor. 

Before making any financial commitments to a franchise, be sure that you can afford all of the costs involved, not just the initial fees. These costs should be made clear from the start, and if you’re in any doubt, don’t hesitate to ask your franchisor.

The franchise fee and cost of equipment required to get your franchise business up and running is usually the bare minimum requirement, so it’s important to look beyond this when it comes to determining the franchise that you can afford to invest in.
—John Saunders, London Loves Business

Who pays franchise royalty fees?

The franchisee is responsible for paying the royalty fees, and this is non-negotiable. The fee amount will be included in the franchise agreement, which is a legally binding document. If you fail to pay the required royalty fees, you’ll be in breach of contract, and you’ll risk losing your unit completely. Do your research, ensure the royalty fees feel fair to you, and then and only then, sign your franchise agreement.

Before acquiring their franchise, most did a wide range of research, with 69% assessing whether the franchise fees were fair and value for money - British Franchise Association [discussing results of 2018 Natwest Survey]

When do you pay franchise royalty fees?

As mentioned above, royalty fees tend to be paid monthly, quarterly or yearly. The interval at which you should pay them will be specified by your franchisor. 

How are royalty fees calculated?

Royalty fees are calculated as a percentage of gross sales, using one of the following calculation structures:

  • Fixed percentage - Royalty fees are a fixed percentage of gross sales. This percentage doesn’t change, though of course the amount due will change with how much revenue you pull in. This is arguably the simplest royalty structure, and therefore, the most popular.

  • Increasing percentage - Certain franchisee royalty fees will be higher than others, determined by a number of factors, including location. If you’re running a franchise in an area with high foot traffic, for example, your royalty fee percentage might be higher.

  • Decreasing percentage - Some franchisors will reward their most profitable franchisees by reducing their royalty fee percentage. This provides a clear incentive to achieve and encourages other franchisees.

How much does a franchise royalty fee cost?

Royalty fee rates usually range between 5-9%. Exact figures are unique and impossible to determine ahead of time, as the fees are a percentage of your gross sales. You’ll never pay more than you’re able, as your fees will then naturally be lower in a slower year.

Why do you pay franchise royalty fees?

Franchise royalty fees go to your franchisor, and are generally reinvested back into the business on things like administration, training, support and the maintenance and running of the franchise system. The money that you put back into the business will often filter down to you, securing you the training that you need and helping you with everything from location fit-out to marketing support. For more specific details about where the money is going in your own franchising arrangement, peruse your franchise agreement to find a fee breakdown.

Franchisors provide tons of business support to franchisees so that franchisees don't face the same pressure as independent business owners. They are given marketing support, strategic planning, and field consulting. It also costs money to keep up with the administrative aspect of a franchise, like running the company headquarters, so royalty fees are used in this capacity as well.

What other ongoing fees might I need to pay as a franchisee?

In many franchising arrangements, other ongoing fees might be charged alongside royalty fees, such as a monthly marketing and advertising fee which will go, as you might have guessed, towards marketing and advertising your business. Marketing is no small feat, and for a minimal fee, you’ll have a lot of stress taken off your hands.

The combined costs of franchising can seem expensive, and might put you off of making an investment, but in order to make a fair assessment, you’ll need to lay the benefits of franchising alongside the associated costs. As a franchisee, you’re joining an established company with a proven track record of success and a working business model. As a result, you’re far less likely to fail. In fact, in 2018, fewer than 1% of franchises closed due to commercial failure [British Franchise Association].

When you’re running a franchise, there’s a lot to consider

Getting to grips with your financial obligations and responsibilities is step one. To continue your franchising journey and gather all kinds of invaluable insights, browse Point Franchise’s comprehensive range of franchising-focused articles.

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