Many businesses are now doing franchising to grow at a faster pace and have more locations throughout the world with franchise branches.
It gives extreme power to the franchisor and the franchisee in terms of value. Franchising is essentially a fee-based contractual agreement for both sides.
You pay several start-up fees only once to open the franchise, but there are also some ongoing fees after you open the branch.
One of the ongoing fees is the royalty fee. It takes the biggest percentage out of a franchise’s ongoing fees. In this article, learn more about royalty fees in franchises and how they work.
What Are Royalty Fees In Franchise?
Royalty fees are the fees that you pay to keep using an intellectual property someone created; these is brands and associated trademarks in franchising.
Another way of looking at royalty fees is that it is a subscription fee that you pay to most other products to keep using them. Royalties are the same.
Unlike any other franchise fee you pay, the royalty fee is the profit center for the franchisor because it is a recurring revenue and mostly depends on your income.
Paying the royalty fee gives you the right to keep using proprietary trademarks, processes, every brand associated with the main brand, intellectual properties, and everything else.
However, paying this fee doesn’t give you the right to own these. You must run them by the guidelines and rules of the original brand.
Why Should You Pay A Royalty Fee?
For a franchise to profit from every franchise branch and be able to keep going, there must be recurring revenues.
This increases the brand’s value and ensures that the brand can keep growing. That’s one of the biggest reasons why royalty fees exist, and every franchisee should pay them.
Even though there are cases where some franchises do not ask for royalties, they include other things in the agreement that will benefit them in one way or another.
Another reason why royalties are important is that you are essentially buying a brand.
If that brand is popular enough and allows you to get customers from day one, you have to pay its recurring value.
- Calculation Of Royalty Fees
Royalty fees don’t come in one size, it varies in every situation, both in the payment amount and how it’s calculated.
Every business has a different way of working, but there are four main ways that almost all businesses work.
2. Gross Sales Percentages
The most common method of paying royalty fees is getting a certain percentage from the branch’s gross sales.
This benefits both sides as it doesn’t burden the franchisee and also ensures the franchisor will have an income unless its brand is not popular.
There could be three settings for percentage calculations:
- Fixed percentage
- Increasing percentage
- Decreasing percentage
All of these focus on getting a percentage from your revenue, but the yearly or monthly change of the percentage depends.
How the percentages will change will be on your contract so that it can go according to the law.
3. Fixed Royalty
As the name suggests, both sides agree on a fixed amount, and the franchisee pays this amount on the agreed time period, monthly, quarterly, or annually.
This is a risky agreement for the franchisee because they might have to pay the fee whether there is any sale or not.
However, it is a less risky approach for the franchisor as they will get their fee no matter what.
4. Minimum Royalty
This type of royalty comes as a safety net alongside the gross sale percentage royalty fee scheme.
They are generally agreed upon together, and minimum royalty comes into play if there are no gross sales revenues to take from.
This is beneficial for the franchisor to ensure that the franchisor will get paid no matter what, but it’s not good for the franchisee.
5. No Royalty
Even though it is extremely rare, there might be no royalty fees at all in some cases. However, this doesn’t mean that the rights to use the brand will be free or extremely low.
In most scenarios, the franchise brand owner asks for something else in return, whether an amendment to the agreement or another fee in the agreement.
Are There Other Fees Besides Royalty Fees In Franchise?
Normally, there are only three fees with franchises; some are ongoing fees, and some are one-time fees.
Here are those three franchise fees:
- Initial franchise fee
- Marketing fee
- Royalty fee
You pay the initial franchise fee to buy the rights to the brand for the first time, and it is a lump-sum, one-time fee.
Marketing and royalty fees are ongoing, and you have to pay these fees on an agreed schedule, monthly, quarterly, or another timeline.
Marketing fees are generally low and come as a percentage of the gross sales; their aim is to help the marketing efforts of the brand.
You May Also Read: What Is Liquid Capital For A Franchise?
Franchising is a cost-based business agreement that includes recurring revenues for the franchisee to pay.
To keep using the brand name and anything associated with the brand, you have to pay the royalty fee to the brand, which is one of the most important fees.
Royalty fees come in different shapes and types, but the main aim is to ensure that the franchisor gets the value of its brand on a recurring basis.
Amit Gupta is the founder of DrFranchises – a digital marketing agency that helps brands rank better on Google Maps through local SEO strategies. Amit has over 11 years of experience in digital marketing, SEO, email marketing, and social media marketing. He’s also the owner of multiple franchises and has helped countless brands achieve success online. When he’s not working, Amit can be found playing with his dog.