Updated: Oct 9
If your business is flourishing and you’re beginning to wonder how you’re going to properly enter the world of franchising, franchise fees and royalties are probably among your top concerns.
By definition, the franchise fee is the amount paid by a franchisee to the franchisor in order to be permitted to utilize the company’s products, brand, and intellectual property. Meanwhile, the royalty fee is a recurring fee being paid by the franchisee to the franchisor typically every month or every quarter and it usually amounts to a portion of the sales.
So, why do you need to compute the franchise fee and royalty of your business before you have it franchised?
As a business owner and future franchisor, you have to compute your franchise fee so that you will be able to properly determine how much your would-be franchisees will pay for the rights and support services such as site evaluation, initial training, resources, marketing, grand opening, and procurement and setup. The franchise fee will basically make sure that you as a franchisor will be able to help your franchisee start their operations smoothly.
Meanwhile, you have to determine and compute the royalty fee or percentage that you’re going to impose on your franchisees on a regular basis because this will sustain your on-going support activities like research and development and periodic store visits.
Without properly computing these fees, your business could suffer on both the franchisor’s and the franchisee’s ends.
Even though the franchisor is in-charge and the most knowledgeable in computing these fees, it would be best if franchise experts and consultants will be reached out so that they can help in facilitating and systematizing the tedious process of computation.
In terms of computation, the franchisor must look at both internal and external factors.
Internally, the franchisor needs to reflect on their own operations, expenses, and revenue streams. Externally, the franchisor needs to look at what the market can bear. Ultimately, the franchisor should be able to balance both their needs as well as that of their franchisees’ in coming up with an equitable franchise package.
On the other side of the coin, a prospect franchisee looking for a business to franchise should scrutinize how much similar franchise concepts are offering. If the difference is too significant, try to find out why. Ask yourself, “What does the cheaper franchise concept lack that the more expensive brand have?”
At the end of the day, a successful franchise gives franchisees 90% chances of success over time as compared to starting up a business from scratch. The reason why chances are higher is because the franchise is already developed and proven. And the tireless efforts of franchisors to continuously improve and strengthen their brand and system are what’s being covered whenever a franchisee pays for the franchise fee and royalties. #