How do franchise royalties work? Say, for example, that I was going to franchise my business. What would the first couple of franchisees pay in franchise royalties, since the franchise hasn’t grown that large yet?
There are no absolutes or standards regarding franchise royalties
We wish there was a simple answer to your question, but there isn’t. The fact is that franchise royalties (as well as advertising fund fees) can run the gamut. Some franchisors prefer flat monthly fees that ensure a known income and eliminate oversight and audits. Others want a minimum monthly fee or a percentage, whichever is greater. Still others call for a percentage ranging of 3 to 7 percent, or even a greater percentage of gross sales. With regard to startups, we think there are strategies to entice early franchisees to join the system other than reduced franchise royalty payments.
Franchise royalties and “generalities”
As development consultants, one of the major issues that we have with franchise “generalities” is that they take a “one size fits all” approach. But, franchising, when done correctly, should reflect the individuality of the concept and the entrepreneurial mind and energy that brought it to success. Planning for franchise royalties is a key concern in establishing a new program. They should have a rational basis and the best way to do that is to connect them to what is being gained from paying them. That, of course, will (or at least should) vary from system to system.
Good strategic planning demands that all the pieces of the franchise development puzzle fit together. Copying parts of another franchisor’s successful system is generally a mistake. The personalities and drivers of the copied system may be a very poor fit for the new franchise company. For example, many prospective franchisors have asked us to provide an offering circular as a “template” or guide for them to use in writing their own documents. We always decline this request because copying in this industry is a road to perdition. Copying another franchise plan rarely proves successful. Ultimately, there is no rhyme or reason to the new offering.
Franchise royalties and income streams
If a new franchisor desires to entice the first round of franchisees with reduced costs, it might be better to work on upfront fees and incentives rather than dilute future income. A good franchisor thrives on the success of franchisees, and that means franchise royalties.