Can You Offer Some Information On Franchise Royalties?
I’m thinking of franchising my business. Are there simple rules regarding franchise royalties?
There Are No Absolutes Or Standards Regarding Franchise Royalties
First, for those new to the subject, here is a short, general explanation of franchise royalties. Royalties are generally a monthly fee paid by a franchisee to the franchisor for continued use of a commercial symbol (trademark), support services, the operating area/territory and any and all other items so defined in the franchise agreement.
Now, franchise fees run the gamut from initial fee to advertising fee to royalties. Some franchisors prefer flat monthly fees that ensure a known income and reduce 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 reducing royalties.
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 As 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.