Franchise Royalties - Finding a Win-Win
Franchise Royalties - Finding a Win-Win
I have heard more than one client say to me, I will never pay a royalty. I have other equally experienced business executives say that royalties are not a major concern in their decision to purchase a franchise. If you are considering owning a franchise, you will need to establish your own opinion regarding royalties.
Rombong
Most people are familiar with the upfront costs that are frequently associated with owning a franchise. There is usually a franchise fee, often a fee for training, the cost of equipment, leaseholder improvements (if you will be operating a franchise with a retail location), money for operating capital etc. However over the life of a franchise, it is possible that a franchisee will pay more in royalties than all of the startup cost combined. While this may seem daunting, in many ways it is actually represents some great things, namely that as a franchisee, if you have paid a lot of royalties, chances are you have also made lots of money.
Franchise
While there are certainly exceptions to this rule, most companies charge royalties on gross earnings (the earnings your company make before reducing them by expenses). That means, the higher your gross earnings, the higher your royalty payments. Personally I like to see franchises with a well-documented, and modest royalty requirement. It acknowledges to all parties in the agreement that the franchise system will be there for the franchisee to provide long-term support, marketing assistance, and in many cases brand recognition. Having said that, I have seen some top franchises require zero royalties.
In the long run, as a potential franchisee you will need to carefully evaluate the Franchise Disclosure Document and all contracts to determine the costs and benefits of royalties and other related operating costs. For example, look at contracts to determine if future equipment or supply purchases must be made through the franchise. Mark-ups on these required purchases sometimes off-set royalty payments and still account for the fact that as your business grows you will pay more to the franchise system.
Royalties tend to range between two and ten percent, though there are franchises with satisfied franchisees that charge considerably more and great franchises that charge no royalties. Some systems charge a flat monthly rate that makes it easier to predict what long-term costs will be. It is impossible to judge whether a particular number is fair without an understanding of all other costs, and contractual obligations. You should be careful to spend time discussing royalties with existing franchisees when you do your validation process. Ask current owners if they feel they are getting value for the expenditure.
If you are the kind of person who enjoys working with a team and appreciates the fact that a franchise has a prescribed process in place for you to follow, then you will probably also appreciate the fact that paying royalties customarily brings you access to industry experts, and support personnel who will be there when you need them. On the other hand, if following someone else's process is your idea of a bad day, then franchising probably isn't a good choice for you, and you are likely to resent long-term royalty payments. Either way, look for a win-win situation and good luck in your endeavors. Are You Travelling to the World Cup This Year? How To Make Sure Your Holiday To Tenerife Is Less Stressful Beach Volleyball – Fun in the Sun Vietnam Tour 10 Days Hanoi Halong Hue Hoian Saigon Places for tourists in Spain –TORREMOLINOS Your Trip to India – All there is to know Top 7 Worst Holiday Destinations Fabulous Cruise Deals for Relaxation Seekers Celebrity Evening Dress Matinee Theatre Tickets London When you make your trip to Lauderdale by-the-sea Information About Holiday Rentals In Florida Plan Your Holiday Reunions