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Franchise Royalties

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Part of a franchisee's ongoing expense typically includes regular royalty payments to the franchisor.

Definition of a Royalty Payment

Royalties are paid for the continuous use of a piece of work, such as the payments made to an author for a book that is on the market. These expenses are in addition to any one time initial fees. The payments are usually lower than upfront fees since they are a continuous regular expense.

With regard to franchise royalty payments, the franchisee experiences daily sales as his or her main source of revenue. However, the regular monthly income that the franchisor earns is based on royalty payments from each franchisee.

Why Charge Royalty Fees?

The recurrent royalty fees are in essence contributions to the entire organization. The payments are used to maintain the system and ensure that all avenues flow smoothly between the franchisor and franchisee.

Royalty payments are typically paid to the franchisor to stay current on technological advances as well as to enable the creation and marketing of fresh products and services. Also, these payments are collected to pay expenses that are incurred at the franchisor's headquarters such as rent, utilities, and employee compensation.

Furthermore, the royalty payments can enable the franchise company to extend its products and services into other regions and possibly into other countries. As more creative advertising is set forth, the organization's brands become increasingly identifiable. Therefore higher business and profits are realized for both the franchisee and the franchisor.

Although the franchisee may not understand the need for the royalty fees at first, it becomes more evident as time goes on that the payments create a win-win situation for both sides.

How Much Should a Franchisee Expect to Pay in Royalty Fees?

There are several formats in which royalty payment systems can follow. Fees are typically paid on a monthly basis.

The most frequent type of format is having the fee calculated on about 5-8 percent of the total gross sales that the franchisee earns. However, there are some franchise organizations that may charge a higher percentage based on net sales (after expenses), usually somewhere around 6-10 percent.

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