If you are just starting to explore franchising as a business opportunity, you may find yourself unfamiliar with certain phrases or concepts unique to the industry. Understanding what these refer to will help you make informed choices as you move forward in your exploration of franchising as a business opportunity.
A franchise is a type of license that allows a franchisee access to a franchisor’s proprietary trademarks, processes and business knowledge. Prior to opening a franchise, the prospective franchisee would have an opportunity to review a Franchise Disclosure Document and to complete a Franchise Agreement. Together, these documents outline the various payments and fees owed to the franchisor by the franchisee for the opportunity to operate under the franchisor’s business or brand name over a set period of time. On such fee is a Royalty Fee.
What Is a Royalty Fee?
Royalty Fees are paid by a franchisee to a franchisor on a regular basis for the ongoing use of that franchisor’s trademarks, processes and/or knowledge. Royalty fees are incurred on a regular basis and are paid in a set timeline (for example, monthly, quarterly or annually). Royalty Fees should not be confused with the Initial Franchise Fee, which is a one-time payment made by the franchisee when the business relationship with the franchisor commences. A way to differentiate them is to remember that the initial franchise fee is what “starts the engine” to the entire process, while royalty fees act as the “gasoline” for the business whose tank needs to be refilled to continue to operate.
What Is The Benefit of Royalty Fees In Franchising?
Typically, a franchisor will use the revenue stream provided by royalty fees to support its existing franchisee network and to maintain and grow the franchise system. For example, the support provided by a franchisor through its field consultants, ongoing training opportunities, and marketing plans may be funded through Royalty Fees.
How Are Royalty Fees Determined?
Most franchise organizations will charge a royalty fee. In fact, over 9 out of 10 franchisors do. Of those, most charge a percentage of revenue, while just a small few may charge a fixed dollar amount. Fixed royalty fees are exactly that – a set dollar amount regularly paid by the franchisee within the time frame set forth by the Franchise Agreement. A percentage-based royalty fee requires the franchisee pay a percentage of sales or gross profit over a fixed period, (for example, a month or a quarter). While the actual ongoing royalties paid to franchisors may vary by industry, the average royalty fee for all verticals is 6 percent of monthly revenues.
If you are interested in learning more about franchising or would like to learn more about franchising with The UPS Store, please fill out our online franchise information form or check out our franchising FAQ page.