Royalties should never discourage you from getting into franchising. Derek Cafferata explains the importance of royalties for a successful franchise business.

What are Royalty Fees?

Royalty fees are paid by a franchisee to the franchisor to the continuous use of the franchise brand and business model. This fee is usually paid regularly on a monthly basis for as long as the franchisee is in business.

The royalty fee a franchisee pays to the franchisor benefits both parties involved. For the franchisor, the royalty fee enables success of the overall brand, something each franchisee reaps the benefit of. A successful franchisor makes for successful franchisees, and successful franchisees make for a successful franchisor.

“The relationship between franchisee and franchisor should always be mutually beneficial in order to create and foster a successful business relationship,” says Derek Cafferata, CEO and President of All State Franchise Finders, one of the country’s leading franchise experts. “A realistic and clearly defined royalty fee is a key basis from which to build a successful business relationship that is mutually beneficial.”

Different Types of Royalty Fees

Fixed-price royal fees and percentage-based royalty fees are the two main types of royalties franchisees pay to the franchisor.

The fixed royalty is a set amount paid each month, usually from a few thousand dollars up to $20,000 or above. A fixed royalty fee can be beneficial for a franchise unit that is established, growing and successful. However, this type of royalty can be difficult, or daunting, for a new franchisee who is just starting.

A percentage-based royalty is where the franchisee pays a percentage of their profit each month. This percent can range significantly, from four to eight percent, right up to 40 percent. The percentage-based royalty can be very attractive to a new franchisee who is making a small amount of profit starting out, but can lose its attractiveness to a successful franchisee who is making significant monthly profits.

“There is no right or wrong option when it comes to franchise royalties,” says Derek. “Each franchisee needs to clearly understand the royalty fees required by the franchisor and choose which suits them best, based on potential earnings, the success of the franchise and what they will feel most comfortable with over the long term.”

Understanding the importance of royalties for a successful franchise business is vital to deciding which type of franchise fees, and therefore which franchise, is most suitable.

Royalties for Marketing and Brand Awareness

A successful franchise business will have great marketing and brand awareness across a wide area. Branding a name takes a significant amount of money, especially when done well. When a franchisor puts time, effort and resource into effective marketing and brand awareness, every franchise unit benefits.

Royalties to Expand the Business

Royalty fees are also important for expanding the business, locally, regionally, nationally and even internationally in many cases. A strong, powerful and expansive brand has a positive effect on the growth of every single franchise unit, meaning each franchisee benefits from the positive growth of the brand.

Royalties to Develop Products and Systems

Derek Cafferata believes that one of the greatest benefits of the franchise business model is that a person can go into business for themselves, without being by themselves.

“All the set-up, systems and framework of the business have been tried and tested and is there for the new franchisee to utilize and benefit from.”

Royalty fees enable the franchisor to continue to develop these systems. Royalty fees also enable the franchisor to keep up-to-date with the latest technology and product design, giving the business a better opportunity to stay ahead of the competition and establish a reputation as the market leader within their specific industry.

Royalties for Ongoing Training and Support

Franchisors understand that successful franchisees make for a successful business overall.

“The aim of any good franchisor is to help create, support and develop successful franchisees,” says Derek. “One of the best ways to do this is to offer continued training and development of the business model.”

It is the money they receive from royalties that enable franchisors to do this, whether that be through one-on-one support, conferences, staff and management training or leadership coaching.

Franchise Experts All State Franchise Finders

Understanding the royalty fees of a potential franchise investment is key to making the right financial decision that is right for you. Whether it be percentage-based or a fixed monthly amount, it pays to seek the advice of a franchise expert who can help guide you through the franchise contract and purchase process of a franchise unit.

To speak to an experienced franchise expert, contact Derek and his team at All State Franchise Finders on 1-800-544-2161 or visit allstateff.com today.