How to Understand Franchise Royalties When Choosing a Franchise

🕒 Estimated Reading Time: ~2 minutes

When starting a franchise, one of the biggest questions you are probably having surrounds finances. How much will you invest, and what will your long-term franchise finances look like?

Franchise fees include the initial franchise investment plus any contributions you might need to get your business off the ground. These include money paid toward advertising, training, and other services.

Royalty fees are part of the ongoing fees. These are typically a percentage of the franchise’s sales taken by the franchisor during your contracted term.

Knowing why this fee exists is important to know while researching your opportunities and also to your future success as a franchisee. Unfortunately, trying to understand royalty fees often leaves many potential franchisees scratching their heads. Let’s dig deeper into royalty fees.

Why Royalty Fees in Franchising Matter to Franchisees

You have probably heard the term royalties before when it comes to businesses. These are fees paid to the original person who created a piece of work — art, writing, a brand, a song, etc. — for the use of what they made. Franchisees pay royalties to the original owners of a brand for the continued use of the pre-existing branding and business plan they are using for their business.

These fees aren’t arbitrary or filling someone’s trust fund, though. They’re a necessary part of the business model because royalties allow the franchise to maintain consistency across all regions and territories. As a franchisee, you want that consistency because it will enable the franchise to bolster its image and build a stronger reputation nationwide, organically attracting more people your way. They also are used towards improvements and evolutions of the business system.

What Do Royalty Payments Look Like?

Royalties vary with each franchise, so it’s important to talk to the franchisor about these fees before you invest.

Some royalties are paid monthly, while others are paid weekly or quarterly. Some royalties are paid as a percentage of sales, while others are a flat fee instead of a percentage. Some royalties are taken based off of gross sales, while others are taken as a percentage of the net profit.

Knowing how the franchise you’re considering investing in operates will help you better predict your finances.

Will You Have to Pay Royalties Forever?

Yes, you will probably be paying the royalty for the length of your contract with a franchisor. But remember, this fee is in place because you don’t have to undergo the business development process the franchisor already has.

While royalties can shock some when considering franchise investment opportunities, understanding their purpose and reasoning can make it easier to pay when you open your doors. Talk to your franchisor about these fees when negotiating your agreement so you are clearer on your finances when you sign on the dotted line and move closer to your franchise ownership goals.

~~

Kimberly Crossland is the founder of Roadpreneur and Cruisin’ + Campfires, two companies designed to keep families together and living in freedom through travel and entrepreneurship. The goal of both businesses is to inspire meaningful change through the power of a strategic, thoughtful approach to life and business. In her free time, you can find her looking for a new adventure together with her two boys.