Continuing in our series of franchising definitions, today we are reviewing royalty payments.
Franchises charge fees when someone wants to buy into their franchise opportunity and operate under the name of the franchise, which includes the use of intellectual property, like logos and the franchise name itself.
In addition to upfront fees, franchises charge an ongoing fee, typically referred to as a royalty payment.
Upfront franchise fees are typically much larger, and are for the initial cost of buying into the franchise. The royalty payment, however, is an ongoing fee that is much smaller.
Royalty payments are typically calculated as a percentage of gross revenue the franchisee generates. However, while this is the most typical model, some franchises charge a flat rate based on a certain amount of time – like every week, every month, quarterly or annually. For example, $500 a month.
Sometimes, we get questions about royalty fees. One question we’ve gotten is if they are negotiable.
Usually, royalty fees are non-negotiable payments. However, there can be exceptions. A well-established franchise with many locations is far less likely to be willing to negotiate royalty fees, whereas a newly-formed franchise, that is just starting to get off the ground, may be willing to negotiate royalty fees, and is usually done on a case-by-case basis.
While the knee-jerk reaction might be to think the franchise royalty payment is a negative thing, there are many reasons why the franchise royalty payment is actually a good thing. Being able to operate under a well-known franchise name can generate business by itself – something that is hard to, especially for a new business, without a known brand name.
At Upside Group Franchise Consulting, we help businesses to form new franchises, as well as help established franchises grow to the next level. If you have any questions about franchising, give us a call. We offer a free initial consultation.