What is the royalty fee and what percentage should it be?

1. What is the royalty fee in franchise business?

A royalty fee is the amount of money paid to the headquarters, called the franchisor, from the franchisee so that they are able to use the headquarter company’s name. By using the company’s name, sales will differ because it is known and trusted brand. A certain quality is implied by the name. In other words, the franchisee pays a fee to be able to use the name and reputation of the franchise.


2. Types of methods to calculate the royalty fee.

There are several methods to calculate the royalty fee. Let’s look at principal forms.

2-1. Percentage of gross revenue calculation method

This is the most common way to calculate royalty fees. The franchisees pays several percentages of their revenue as a royalty fee. In many cases, the higher the sales become, the lower the percentages would be. The percentage varies depending on industries and can go up to 50 percent.

2-2. Fixed price method

This is the simplest way to calculate royalty fees. However big your sales is, the price of royalty fee won’t change. The higher the sales become, the much money will stay with you. Using this method, you will be able to see your efforts clearly. The price depends on headquarters, mainly it is set from a few hundred dollars up to 900 dollars.

2-3. Gross profits method

This method is used mainly among many convenience store chain groups. The royalty fees are based on gross profits (gross sales minus direct cost of sales) and the royalty rate is from 30% to 70%. The percentage is narrowly set according to the sales. This is the system that the franchisee and franchisor split the total profits. Convenience store chain groups have the most sophisticated franchise packages. The money the franchisees paid as the royalty contribute to the improvements of customer collecting, customer spending and operation efficiency, and it is used for merchandise developments, advertising and franchise system improvement.

How to think about royalty fee in franchise business?

It is normal to think about the price when you think about royalty fee. But each industry has its average. You have to find the headquarter that has royalty system that works for you.


3-1. Average rate of royalty fee in franchise business.

Here is the averages of royalty

Food Industry  3%-10%

In this industry, the cost rates are high because of labor fee and material costs. This is the main reason to set the royalty fee rates are lower.

Cram School Industry 10%-30%

In this industry, the royalty rates are set higher compare to the former industry, because it doesn’t have material costs, therefore the costs rate lower.

However each industry has its average, you have to decide whether you can pay the royalty fee.


3-2. What should the percentage be?

The rate or the prices really depends on the industries and headquarters the most important point is that you can convince yourself to pay the price for the brand name and its knowledge. Also you should see other money currencies. The franchisor set accession fee, royalty fee and purchase prices aim at expanding its number of the stores with making the franchise package better. There are many flows of money,“purchase price is expensive, but the royalty fee is cheap,” or “The accession fee is expensive but the payments to the headquarter are cheap after that.” You have to understand how the money flows. This is the most important point to realize for an ideal franchise business, and a good relationship with the franchisor. You should ask the person in charge about the royalty rate directly.


Resume

Royalty fees, rates, prices and calculation methods depend on industries and headquarters. You need to consider which headquarter you will join when thinking about the royalty fee, as the price will vary due to the brand`s power.

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