08 Sep, 2017

Franchise Fees And Royalties

Franchise fees and royalties A royalty fee is a set amount of money that a business franchise owner must pay to be part of a franchise system. Usually, the fee is calculated as a percentage of gross or net sales and it is paid weekly, monthly or quarterly. The franchise fees and royalties cover the privilege of using the franchise's brand and the money is typically used to help the franchisor) offset administrative and support functions. This is the third in the series of IFA Educational Foundation-FRAN data research reports about the franchising sector. Royalty and Advertising Fees Vary Widely In Franchise Systems Franchising offers entrepreneurs a deal: in return for using a franchise brand trademark, getting operational guidance, marketing support and other services provided by the franchisor, franchisees must pay some up-front fees and some ongoing fees. Last month we discussed the initial investment requirements; including initial fees this month we will examine ongoing fees in more detail. Many franchise systems have minimum franchise fees and royalties but some systems have no recurring fees at all. Royalty Fees Most franchise systems charge franchisees a royalty based on a percentage of gross sales. The average is 6.7 percent however, the percentage varies by type of industry, from 4.6 percent for restaurant and hotel franchises to 12.5 percent for personnel services franchises. Some franchise systems use a percentage range that can allow for unique business units and others use a more complex formula. An example of a more complex formula is a sliding percentage scale that adjusts downward as unit revenues rise or is lower for new units. Table 1 shows the average royalty percentages by industry and Chart 1 shows the types of royalty programs used by franchisors – fixed percentage, range, and other. Total Fees Vary Widely By Industry Total fees, which are a combination of royalties and advertising fees, range from a low of 6.3 percent to more than double at the high end of 14 percent. Differences in industries, services provided, and brand value is among the reasons why total fees vary widely from franchise system to franchise system. Table 4 and Chart 2 show the total combined franchise fees and royalties across industries for those systems that base fees on a percentage basis For more information about franchising data and operating characteristics, see Sections I and II of The Profile of Franchise: 2006. I. Franchising is Booming available II. Understanding Initial Investment Requirement of Franchise Systems, available