When a franchisee wants to franchise your business or brand, he or she would be required pay an upfront franchise fee. This upfront franchise fee would be used for covering various things such as marketing, initial employee training, as well as the legal rights to utilize your names, logos, products, and systems. However, this isn’t the only fee that your franchisee would have to pay to you. Additionally, your franchisee should pay you franchise royalty fees.
How Much are Franchise Royalty Fees?
There are various ways you could choose from when trying to determine how much franchise royalty fees to charge your franchisees. Among the most common methods include paying you a specific percentage of the franchisee’s gross sales. In general, this could range from 5% up to 9%, which means that the franchisee would get 91% to 95%. Gross sales are essentially the amount of revenue the franchisee gets from selling your goods, services, as well as other merchandise or products under your brand, and isn’t reduced by taxes, credits, returns, adjustments, allowances, and discounts to family members of employees.
In the majority of franchise systems, the percentage is permanently fixed, but could likewise decrease or increase depending on the success or lack of sales. Some franchisors also impose minimum royalty payments for every period, either by a set amount or percentage. Other franchisors establish royalty fees as dollar amounts dependent on varying sales thresholds.
The Bottom Line
The most responsible and successful franchisors take proper care when accounting for royalties and establishing how much they would charge for royalties. On the other hand, others would just copy the royalty fees their competitors get or choose a specific number without taking into consideration the franchisee.
Preferably however, you must set your royalty payments at a certain amount that would enable your franchisee to still experience a sizeable profit, following all business expenses, so that his or her business would succeed both in the short and long term.