The royalty fees are one of the main fees you will need to pay to your franchisor when you purchase a franchise. These payments, which are usually a certain percentage of the gross sales or business revenues, allow you to use the franchisor’s trademarks and their business system.
Why You Need to Pay Royalty Fees
Aside from paying for the opportunity to operate under the franchise brand, royalty fees also cover some of the benefits you get to enjoy as a franchise owner. These fees pay for continual support and training, business promotion and marketing, as well as consulting services provided by the franchisor.
Prices May Differ
The amount you will pay as royalty fees (which may be removed from your bank account on a weekly, monthly, or quarterly basis) varies based on the franchise. For the majority of franchisors, these fees range from 4 to 6 percent of gross sales, but they can also be higher or significantly lower. Also, some franchisors ask for a certain percentage of sales, while others charge varying rates based on the sales. There are also franchisors that collect a flat fee every month instead of a percentage of sales. Some franchisors don’t even require that you pay any royalty fee whatsoever but factor the cost into the products you will have to purchase from them.
You can pay your royalty fees with a check, or your franchisor may deduct them directly from your bank account. However, it’s important to maintain accurate sales records. This will help the franchisor to know how much you have to pay and prevent you from overpaying.
As a would-be franchisee, it is crucial to read through the franchise agreement to know what you will need to pay as royalty fees. And don’t assume that you will negotiate with the franchisor: royalty fees cannot be negotiated. So, before signing the franchise agreement, make sure to consider whether paying the royalty fee will make it harder for you to succeed in the business or allow you to make profits. Consider the typical revenue of the particular franchise brand after all the costs, including the royalty fees, are deducted and find out what remains. Go ahead with the franchise if there’s a good amount of profit left. However, if what’s left is not encouraging and far from what you wish to be making, consider other franchise opportunities.
What Occurs If the Franchise Owner Is Unable to Pay the Royalty Fees?
You have to be sure that the franchise agreement includes the penalty for refusing to pay the royalty fees. A lot of franchisors see not paying royalty fees as a breach of the agreement between them and the franchisee, so they may want to end your franchise contract or hold you responsible for other costs. Make sure to go through the fine print carefully to know what you are signing up for.
