One of the fees you will be required to pay to your franchisor if you buy a franchise are royalty fees. These fees, which are typically a fixed percent of your revenues or gross sales, give you the right to use the franchisor’s brand and operating system.
Why You Have to Pay Royalty Fees
In addition to paying for the privilege of being a part of a franchisor’s brand family, royalty fees pay for certain benefits you receive as a franchisee. These fees cover ongoing training and support, marketing and promotion, and consulting from the franchisor.
Prices May Vary
How much a franchisor charges in royalty fees (which may be taken out of your bank account weekly, monthly, or quarterly) depends on the franchise. Most franchises charge between 4 and 6% of gross sales, though they can be lower or even much higher. While some franchisors charge a set percentage of sales, others charge escalating or declining percentages, depending on what your sales levels are. Others charge a flat monthly fee rather than a percentage. Some don’t charge any royalty fee at all, but build the cost into the products you are required to buy from the franchisor.
You may need to write a check for your royalty fees, or your franchisor may simply draft them from your bank account. Keeping accurate sales records is a necessity so the franchisor knows how much you owe and you don’t end up paying more than you have to.
It’s important for you to review the franchise agreement to find out what you will be required to pay. And don’t expect to negotiate: royalty fees are non-negotiable.
Before you sign the dotted line, however, consider whether paying that fee will put you in the hole or allow room for profit. Look at the typical profit of a franchise in this brand after all expenses, including those royalty fees, and see what’s left. If there is still a healthy profit left over, proceed. But if the numbers don’t make sense and don’t indicate that you will be making the kind of money you hoped for, move on to a different opportunity.
What Happens if the Franchisee Can’t Pay the Royalty Fees
Make sure that the penalty for not paying fees is outlined in your franchise agreement. Most franchisors consider not paying royalty fees a breach of the franchise agreement, and they may terminate your franchise or hold you liable for other expenses. Read the fine print so you know what you’re getting into.