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Small Business Resources > Franchise Royalties - What are Franchise Royalties?

Franchise Royalties - What are Franchise Royalties?

What are Franchise Royalties?
Franchise royalties are additional fees that are paid to the franchisor on a continuous basis over and above the initial startup costs. The royalty fee can be calculated using a few different methods. However, the fee is usually based on a percentage of the franchisee's income. The fees constitute regular monthly earnings for the franchisor.

What is the Purpose of Royalty Fees?
The main purpose of these ongoing fees is to contribute to the assurance of keeping the entire system current and running efficiently. The contributions are typically used for such items as staying fresh with technological advances and also in the creation of marketing and promotional materials. Additionally, the fees assist in paying ongoing costs at the organization's headquarters such as rent and utilities.

Another overall advantage of the royalty payments is that they may also be used to expand a product or service into other regions and countries by additional promotion. This can lead to higher profits not only for the franchisor but increased business for the franchisee. Another plus is that the brand becomes more recognizable.

Types of Royalty Fees
The most common royalty calculation is usually based on approximately 5-8 percent of the franchisee's gross sales. Some franchisors use a different method in calculating the royalty payment; they base it on 6-10 percent of net sales after expenses. Also, there are a few franchisors that charge a flat fee without regard to sales.

Keep in mind that franchise royalty fees are usually fair and standard; leaving no room for negotiation. They are developed with the guidance of financial professionals and attorneys. However, it is wise to learn what the fees are before investing in the franchise and do some comparisons to make sure the fees for that organization are in line with others franchises.

Although the franchisee may not initially comprehend the necessity of the ongoing royalty fees, the benefits that the fees produce usually become more obvious as the franchisee continues with the business.

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