Written By the Franchise Matchmakers Team
In order to buy a franchise, you are required to pay certain fees to the franchisor in exchange for obtaining a valuable business model and all of the services, products, processes, trademarks, and continual support that go along with it. If you are considering investing in a franchise, you should conduct thorough research into the legal obligations and expectations it includes so you can make informed decisions about your investment and set yourself up for success. Review the information below to learn more about these fees, and then contact Franchise Matchmakers to find the right franchise for you.
Franchise Royalty Fees: What Are They?
Franchise fees refer to any fees a franchisee pays to a franchisor to obtain the right to operate their business under the franchise brand. The fee structure is established by each franchisor and comprises three primary types of fees:
- An initial franchise fee is a one-time fee charged at the beginning of the deal that covers the basic franchise costs of goods and services needed to set up the business and making it fully operational.
- Periodic marketing and advertising fees that contribute to the franchise’s national fund.
- Ongoing royalty fees for franchise maintenance.
Royalty fees consist of the administrative costs of running the franchise, expenses incurred to promote the business and expand it with new franchisees, and continual guidance and support offered to the franchisee by the franchisor. This support can consist of business strategy development, marketing campaigns, field consultants, and other initiatives designed to maintain or improve the franchise.
How Do Franchisors Calculate Royalty Fees?
Typically, franchisors calculate royalty fees by calculating a percentage of your franchise’s gross sales, meaning the more you make, the more you will owe. Royalty fees vary based on the industry, with an average of 6%. According to Small Business Trends, the lowest royalties are for photographic products and services franchises at 4.9%, and the highest royalties are for business-related franchises at 10%. However, even within industries, franchisors can calculate different fees, so it is vital to compare the franchise costs of different companies within the same industry.
In some cases, franchisors will base their royalty fees on a fixed sum rather than a percentage. This method can be beneficial because it prevents the fees from rising with increased business, but it can also negatively impact you if your sales decrease. Alternatively, franchisors can set predetermined sales thresholds and calculate royalty fees by whether or not the franchise meets these thresholds. For example, sales that fall within a certain dollar value range could require one set amount, while sales that exceed this range could require a higher amount.
Are Franchise Royalty Fees Worth It?
You might feel that royalty fees are not worth the investment to buy a franchise, but they allow you to take advantage of the wide range of benefits offered by a franchise. To decide if franchise royalty fees are worth the cost, you can calculate the average profit for a particular franchise location, minus all fees and expenses, and compare this value to the initial investment you make to buy a franchise to determine your expected return on investment. Compared to creating a business on your own, becoming a franchisee offers a number of significant advantages that can make it extremely valuable.
When you buy a business, you benefit from a business model that has already been created, proven successful, and vetted for potential issues, meaning you are less likely to make mistakes. You have constant support from knowledgeable, experienced professionals to assist you with any problems that may occur. When your brand’s value increases, it directly enhances the value of your franchise and improves your chances of greater success. You enjoy higher purchasing power than would be available from your own independent business, and these savings correlate with higher revenue. Finally, selling a franchise is much easier because of the brand’s value and because you have a franchisor to guide you through this transition.
Contact Us Today to Learn More If you would like to explore your options to buy a franchise, contact Franchise Matchmakers today. Our team of expert professionals offers over 60 years of experience in the industry, helping clients connect with qualified franchisors for free. We can provide information on franchising, discuss your interests and goals, help you obtain financial assistance to buy a franchise, and find the perfect business opportunity for you.