What are Franchise Royalty Fees and How do They Work?

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Franchise royalty fees are additional fees paid to the franchisor on a continual basis on top of the initial franchise fee. Here’s why they’re paid.

MAIN TYPES OF ROYALTY FEES

In addition to an initial franchise fee and other pertinent costs associated with starting your new business, franchise royalty fees are paid on an ongoing basis, and the details of the structure as it applies to any particular franchise will be detailed in Item 6 of the brand’s Franchise Disclosure Document (FDD). These fees are typically drawn as a percentage of weekly or monthly sales, but may also be a flat weekly, monthly, or annual fee. Unlike the initial franchise fee, royalty fees go toward supporting your use of the franchisor’s brand, intellectual property, operating systems, ongoing training, support, and more.

An advertising fee is also paid to the franchisor on an agreed-upon schedule to support advertising or marketing efforts on your behalf. This may be called an advertising fee, marketing fee, brand fund fee, etc., but the basic function is the same: to support promotion of the brand systemwide. As with the royalty fee, it is detailed in Item 6 of the FDD and can be a percentage of sales or a flat weekly, monthly, or annual fee.

WHY FRANCHISE ROYALTY FEES MATTER

The typical franchise royalty percentage ranges from 5% to 6% of volume, but fees can range from lower to much higher, depending on the franchise and industry. Regardless of how much your franchisor is asking you to pay, you should be reaping all the benefits of relying on an expert team and their resources to help you build your business.

As a franchisee, you will have a reliable, scheduled payment that gets invested in research and development campaigns, marketing approaches, and sales tactics. The franchisor uses its own funds to test any innovations in your business, then rolls out a market-tested system to the franchisees. Some franchisors are certainly better than others when it comes to keeping their brand and business model current, and you can uncover this in your research of a franchise prior to investing. Tailored Living, for instance, offers flat royalty fees, and other key differentiators

WHY ARE SOME ROYALTY FEES HIGHER THAN OTHERS?

There can be several justifications for why some franchises charge lower or higher royalty fees, including the level of ongoing support and the type of or volume of the business at hand. For example, a restaurant franchise is a high-volume business, and it’s not unheard of for these types of businesses to exceed $1 million in annual revenue. Because of volume, the franchise royalties are usually on the lower end of the royalty scale in terms of percentage.

Service businesses that do not require their franchisees to carry significant amounts of inventory typically have higher royalty rates, as the margins allow more room for both franchisor and franchisee to hit their marks.

While navigating the possible shellshock of some brands’ fees, it’s important to remember that, as a franchisee, you want your franchisor to make money. In order to fuel your success, your parent company needs to be continually growing brand awareness and strengthening practices and operations to keep you ahead of the game. And to accomplish that, franchisors rely on the stream of income supplied by their franchisees.

When considering prospective franchisors’ royalty payment structure, it’s important to remember that these ongoing fees should be evaluated in the context of your overall return on investment. Depending on your goals, it is likely wiser to partner with a brand you’re excited about growing with over the long run.

FRANCHISE WITH TAILORED LIVING

As the nation’s leading home organization franchise with over 16 years of franchising experience, Tailored Living has perfected a formula for success that supports and empowers all our franchise owners.

With a large network of successful franchisees, low fees, high earning potential, a reputation for top quality service, and a dedicated support team, it’s no wonder Tailored Living was recently named a Top Franchise by Franchise Business Review.

To learn more about franchising with Tailored Living, fill out the form.