What is Royalty Fee in Franchise: Everything You Need to Know
What is royalty fee in franchise? Royalty fees in franchises are regular fees paid to the parent company of a franchise. 3 min read
What is royalty fee in franchise? Royalty fees in franchises are regular fees paid to the parent company of a franchise. When a franchisee, or person buying a franchise business, opens their business, they will pay an initial franchise fee and then continual royalty fees in order to run their business under the company name.
What Are Royalty Fees?
Royalty fees are paid to the original creator of a work for the continual use of that work. Authors are paid royalty fees as their books sell, and musicians are paid royalty fees for their album sales. Depending on what type of company is using or distributing the work, royalty fees might be paid regularly or only as the work brings in revenue.
Usually, the property or work is purchased for a one-time fee, and then royalties are paid after that on a monthly or quarterly basis. The initial fee to purchase a work is frequently more costly than the royalties because they are paid multiple times over a long period of time.
Royalty Fees in Franchise
The creator of a franchise business is paid royalty fees from everyone who buys a piece of the business from them to open their own franchise. For example, Bob's Ice Cream Shop was created by Bob, and he decided to start franchising. Sally buys a franchise of Bob's Ice Cream Shop and opens a location in a nearby town. Now Bob isn't only gaining revenue from his first shop, but Sally is also paying him royalty fees in order to operate the second Bob's Ice Cream Shop.
In this example, Bob is the franchisor and Sally is the franchisee. If a franchisor has ten franchisees, they will all pay regular royalty fees to the franchisor.
A business is considered a franchise in the eyes of the Federal Trade Commission under the franchise rule if:
- A company gives a franchisee or licensee rights to its proprietary assets and trademarks.
- A company has created certain standards for their company name that it requires franchisees to uphold if they want to keep operating a franchise.
- The company and franchisee have a financial relationship, meaning an initial payment for the franchise was made and there are ongoing royalty payments made.
Royalty fees in franchise are usually monthly or quarterly payments that can be calculated differently depending on the franchisor's requirements.
Why Royalty Fees?
When a business owner decides to buy a franchise, they begin a relationship with the franchisor that should be well-detailed in an agreement created to govern the relationship, called a franchise agreement.
Franchisees are required to uphold the procedures and practices already established in the company and pay royalty and franchise fees. These payments allow the franchisee to use company branding and assets without infringing on trademarks. This is a similar idea to joining a gym; you pay an initial membership fee and monthly fees to be allowed to use their equipment.
How Are Franchise Fees Used?
The one-time fee that is paid first as the franchise begins is used to cover the franchisor's cost for startup. Among franchise startup costs, you'll find things like:
- Employee recruiting and training
- Site selection (realtor fees)
- Leasing and building
The regular royalty fees in franchise are frequently used by the franchisor to keep up with the continual expenses that are a part of running a successful company. Such continual costs include things like administration, employee salaries, product development, branding, field support, and research.
Typically, a franchisor doesn't gain much revenue from initial franchise fees, but from the ongoing royalty fees. Royalty fees in franchise act as a sort of payment for the support a franchisor gives to their franchisees. Franchisors provide tons of business support to franchisees so that franchisees don't face the same pressure as independent business owners. They are given marketing support, strategic planning, and field consulting.
It also costs money to keep up with the administrative aspect of a franchise, like running the company headquarters, so royalty fees are used in this capacity as well.
A franchise only does as well as the company it represents, so royalty fees are a sort of good faith payment to support the continual growth of the company. As the brand grows in popularity, its franchises will reap the benefits with more and more consumers.
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