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.