Joel Libava
Conversations about franchise royalties generally fall into 5 clear-cut categories.
- “Why do I need to pay royalty fees? What are they for?”
- “I’m not sure if I want to pay them.”
- “Paying franchise royalty fees are just part of owning a franchise.”
- “These franchise royalties are too high.”
- “I’m sick of paying royalties!“
Maybe if you knew more about franchise royalties…
What Are Franchise Royalties?
In a nutshell, royalty fees are paid by franchisees to the franchisor…for services rendered
In most cases, franchise royalties are paid on a monthly basis. And the amount is normally based on a percentage of sales.
For example, if your franchise business has a $40,000 month (in sales), and your franchise agreement states that your royalty fee is 7%, you’d owe your franchisor $2800 for that month.
Subsequently, if you had a year in which your franchise business did $40,000 in sales every month, you’d owe a total $33,600 on franchise royalties. Because $2800 X 12 months = $33,600. Got it? That’s a lot of money!
Unless you’re getting a nice return on those royalty fees.
What Does Paying Franchise Royalty Fees Get You?
Franchisees pay royalties every month in exchange for a wide range of benefits and support. These are the things that help them establish and operate a successful franchise business. Some of these benefits include:
- Access to a well-known brand
- Ongoing training/support
- Marketing and advertising efforts
- Product procurement/purchasing power
- Top-shelf operating systems
- Ongoing research and new product/service development
- Newer technology
And more.
Let’s go into each benefit of paying a franchise royalty in more detail.
The Benefits Of Paying A Franchise Royalty Every Month
- Brand Recognition and Reputation
Arguably, one of the most significant advantages of being a part of a franchise system is the brand recognition and reputation that comes with it.
In essence, once a franchise system reaches a good size, its franchisees benefit from the franchisor’s investment in building that recognizable brand. But there’s more.
The fact is, once the franchise’s brand is established, and the reviews are good, a certain reputation starts to emerge.
This reputation can significantly impact customer trust and loyalty, making it easier for every franchisee in the system to attract and retain customers. It also gives franchisees a fantastic competitive edge in their local market area.
- Training and Support
As you’ve learned, franchisees pay franchise royalties to continue getting access to a proven business system and the expertise of the franchisor.
This includes comprehensive training programs that cover various aspects of running the business, such as operations, marketing, and customer service. But it doesn’t stop there.
That’s because there’s usually ongoing franchisee training offered, especially if the franchisor is rolling out new products and/or technology.
In addition to ongoing training (as needed), franchisees typically receive ongoing support.
This support includes guidance from franchise headquarters on best practices, troubleshooting, along with complete access to a network of fellow franchisees who can and do share their experiences and success stories. And they can help support you too.
Collective Marketing Power
- Marketing and Advertising
Royalty fees and (and marketing fees) often fund national and regional marketing campaigns that promote the brand and drive customers to local franchise business locations.
In most cases, marketing campaigns like the ones franchisors administer are costly and time-consuming for individual businesses to manage on their own. But not for franchisees.
That’s because they benefit from the collective marketing power of the entire franchise system, which can result in increased foot traffic and brand visibility. Especially if the marketing department is superb.
- Purchasing Power
One of the lesser-known but critical advantages of franchising is the collective purchasing power the franchise model brings to the table.
Specifically, today’s franchisors can negotiate with their suppliers to secure bulk discounts on products and services. Some of these things include product inventory, equipment, and marketing materials.
This means that franchisees can access quality products and services at a lower cost than they would on their own. This helps them maintain healthier profit margins and compete more effectively on a local level. Hence, another great reason to pay a monthly franchise royalty.
It’s the System!
- Franchise Operating Systems and Efficiency
In most cases, franchisors have fine-tuned their operating systems and business processes over time. These systems are designed to streamline operations, reduce waste, and enhance efficiency. Way more than single local business can.
So if you become a franchisee, you’ll gain access to these well-honed systems, enabling you to run your business more effectively. And maybe even more profitably.
- Research and Development
The franchise royalties you pay every month also go to supporting ongoing research and development efforts by your franchisor. This includes staying ahead of industry trends, developing new products or services, and refining the company’s existing offerings.
If you choose a good franchise to buy, you’ll benefit from the franchisor’s commitment to staying competitive and innovative. In that case, you should expect to receive continuous updates and access to these improvements as they are developed. Bottom line?
Business moves fast these days. You need to choose a franchise opportunity that’s innovative and fast on its feet.
- Access To Newer Technologies
Franchisors typically offer powerful technology for their franchisees to use.
Some of the things franchisors offer include:
- State of the art Point of Sale (POS) systems
- Modern email marketing software
- High-powered internet security systems
- Automated marketing
- Digital payment solutions
- Scheduling software
- Store security solutions
- Phone systems
And a whole lot more.
Are Some Royalty Fees Too High?
In all my years in franchising, I’ve never heard a franchisee say the following:
“The franchise royalties I pay every month are way too low!”
In fact, the opposite is usually true. Especially when they’re publicized.
On September 22nd of this year, CNBC’S Kate Rogers broke this news:
“McDonald’s franchisees who add new restaurants will soon have to pay higher royalty fees. The fast-food giant is raising those fees from 4% to 5%, starting Jan. 1. It’s the first time in nearly three decades that McDonald’s is hiking its royalty fees.”
Kate added the following:
“The royalty fee hikes probably won’t affect many franchisees right away. However, backlash will likely come, due to the company’s rocky relationship with its U.S. operators.”
And in McDonald’s land, a 1% increase is bigly.
To that end, I guarantee franchisees are talking about this amongst themselves. And not in a nice way.
How To Decide If A Franchise Royalty Is Too High
Ask the franchisees.
Specifically, ask the franchisees you call during the research phase of the franchise buying process.
Ask them, one-by-one, if they feel the royalties are too high-based on what they’re getting from their franchisor. Believe me…they’ll tell you exactly how they feel. The trick is to separate the general bitching you’ll probably hear from any real concerns they’re having.
In other words, if you’re hearing the same thing from the franchisees you’re talking to, dig in some more.
What If You Don’t Want To Pay Your Royalties?
I’m not being a smart ass here, but if you have a problem with paying franchise royalty fees, don’t buy a franchise. Ever.
As a matter of fact, the question of whether or not you want to pay franchise royalties is so important, it’s one of the things I ask you about in my Free Franchise Quiz.
Let’s go a bit further.
What if you’ve owned your franchise business for 7 years and you’ve decided that you’re sick of paying the franchisor a franchise royalty every month. Here’s what I’ll tell you.
The franchisor invented the business you now own. That means you didn’t come up with the business concept. Kind of harsh, eh? But it’s true.
Now if you want, you can try and come up with a small business idea that can be easily duplicated and hopefully profitable. Go ahead. Spend a couple hundred thousand dollars and see if things go the way you planned. Hey…they could!
Are you picking up what I’m putting down?
You bought the franchise system, branding and all. So pay them until you sell your franchise business. Because if it wasn’t for them, you could still be working for someone else.
But what if you’re not getting a decent return on your money for the royalties you’re paying?
What if the franchisor isn’t very good, and you’re royalties are going down the drain?
I’m going to save that discussion for another day.
To conclude, paying out 4-5% (or more) of your revenue to your franchisor every month adds up.
That’s why you need to determine if it’s worth it to buy a franchise.
To buy, use, and profit from someone else’s idea.
And pay for the right to do it.
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