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What are Franchise Royalty Fees?

Guest post by: John Henning

Article Overview: Franchise royalty fees vary from one franchisor to the next. They can be very simple or somewhat complex. To begin with, let’s examine why franchisors assess a franchise fee in the first place.

What are Franchise Royalty Fees?

Franchise royalty fees vary from one franchisor to the next. They can be very simple or somewhat complex. To begin with, let's examine why franchisors assess a franchise fee in the first place. Franchisors are allowing you, the franchisee, to utilize their proven business model in order to successfully run your franchise. Franchisors will assess an upfront franchise fee to get you in the door and help you get your doors open for business. But this upfront fee basically covers their costs. It is not really a profit generator.

The primary source of revenue for a franchisor is the ongoing revenue generated from your business operations. In that regard, it is in the franchisor's best interest to make sure that you are successful.

The best way to illustrate the different types of franchise fee arrangements is to give you some examples. Here are 5 franchise opportunities that I like:

Handyman Matters. This is a handyman franchise with over 130 franchised units. They assess a 6% royalty on gross revenues and a 1% contribution to a national advertising fund. This is a fairly typical arrangement.

Maui Wowi. They are the largest Hawaiian Coffee/Smoothie franchise in the United States with 320 franchised units. They do not assess any royalty fees. Instead, they assess a 12% Advertising Fee based on product purchases (not gross sales).

Pressed 4 Time. This is a mobile dry cleaning franchise with 180 franchised units. They assess a typical royalty fee however it is scaled based on the monthly revenue. If the monthly revenue is less than $15,000/month, the monthly royalty fee is 6% of gross revenue. If the monthly revenue is between $15,000/month and $25,000 per month, the royalty fee is 5% of gross revenue. If the monthly revenue is over $25,000, the monthly royalty fee is 4%.

American Ramp. This franchisor specializes in providing home ramp construction and leasing for wheelchair applications. They assess a 3% royalty on gross revenues with a 1% advertising fee. They only have 18 franchised units at present but are growing quickly. The lower number of current franchised units probably helps to explain why their royalty fees are lower than most.

Gotcha Covered. Gotcha Covered franchisees provide custom-made, national name brand window fashions. They have 115 franchised units. They have a fixed royalty fee arrangement. They assess $300/month for the first four months, $700/month for the second four months, and $1,100/month thereafter. This helps the new franchisee get started.

As you can see, there is a lot of variation in how franchisors are rewarded. There is no right or wrong answer.

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Article Tags: average royalty fees, franchise fee structure



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Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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