John Pratt writes: While franchisors must do everything in their power to ensure that their franchisees` operations are profitable. Different sectors and revenue models lead these sectors to specific strategies for setting royalties. There is no necessary way for franchisees to become as creative as they want. This pricing structure varies from 2 to 5%, depending on the nature of the sector and the number of franchisees involved. In some agreements, there is a monthly flat fee with a percentage of turnover. Many franchise agreements have incorporated the costs of the license into the royalty. However, there may be situations where this term appears and the franchisee must therefore understand what it applies to in the agreement. It is in the best interest of the franchisor to opt for an amount that will allow both parties to obtain a healthy benefit from the franchise. If the franchisee`s profit margin is too low, quality-oriented franchisees cannot be recruited and maintained. If royalties are not high enough, investment in the company is also insufficient. In both situations, both the franchisee and the franchisee lose.
As a franchised coach, I work with prospects who tend to place an undue emphasis on franchise licensing fees. These people will look at the main competitors in a market, compare royalties, and quickly decide that the one with the lowest royalty is the first choice, giving them the best chance of increasing profitability. It`s too simple and rarely leads to an informed decision. My advice is simply to think of royalties as individual fees corresponding to the same costs as labor, rent, marketing or incidental costs. The most common way to develop the royalty is as a percentage of the gross turnover (the profit from the sale of services, goods and other products or goods) that the franchisee earns. This type of royalty encourages the franchisee to support the franchisee`s growth, because the higher the franchisee`s gain, the more money he receives. They usually take one form out of three: while the initial franchise fee can be considered as the pre-membership fee as a „member” of the franchise system, license payments can be considered the ongoing „dues” needed to remain members. These payments are recovered by the franchisee to finance the franchisee`s actions, which include both business expenses and franchises. Ongoing license payments are how the franchisee makes a living by supporting their franchisees and continuing to grow the business. The world of franchise fees can be confusing for initial franchise holders.
That is why we intend today to demystify the levy – what it is and why it is needed. In the split-profit royalty structure, the total gain of a franchisee in a split between the franchisee and the franchisee at an agreed percentage, for example. B 40/60. While the shared gain license fee is unusual, it is less favored by franchisees. Although the franchisee does not initially understand the need for royalties, payments create a win-win situation for both parties. License payments may allow the franchised business to expand its products and services to other regions and, possibly, to other countries. With the increase in creative advertising, the organization`s brands are becoming more and more identifiable, which ideally increases stores and profits for both the franchisee and the franchisee. This serves as a safety net for franchisees and is usually implemented alongside the percentage license fee model….