FAQs about the royalty fee

What is the purpose of the royalty fee?

As part of the right of “membership” in the franchise network, a franchisee pays royalty fees to get access to the proprietary business systems, processes and know-how. In addition to this, the royalty fees collected by franchisors are typically reinvested in the business to help their franchisees.

 

What does the royalty fee go towards?

The franchise royalty fee will be used differently by different franchisors but the most common purposes it is used for include expenditure on:

  • Employee recruiting and training
  • Site selection (realtor fees)
  • Leasing and building 
  • Marketing, advertising and promotions
  • Support and ongoing training 
  • Administrative costs of the business 
  • New franchisee recruitment
  • Updates to operating manuals
  • The franchisor’s sale of goods and services
  • Access to experts and expert advice 
  • Research and development campaigns
  • Testing new innovations in the business
  • Keeping the brand and business model current
 

What is a typical royalty fee?

The question of what is the average royalty fee for a franchise can have multiple answers and this will ultimately depend on whether the franchisor charges the franchisee a fixed amount or a percentage of sales. In the case of a percentage charged, it is worth knowing that there will be drastic variations from industry to industry and franchisor to franchisor. Whereas some place the average royalty fee at between 3% and 25%, others indicate that it can start at around 6% and reach up to 50% of total sales. However, there are some cases where franchisors do not charge royalty fees at all. Despite this, they may still require the franchisee to purchase products or inventory from them to make up for the lack of royalty fee payments.

 

How do you calculate a royalty fee?

Franchisors who are looking to find out how to account for royalty payments for a franchise need to be aware that there is no fixed rule for determining royalty payments. The determination of royalty fees will depend on mutual benefit as well as what constitutes a healthy profit for both parties. It’s also worth considering what benefits you are offering your franchisees, calculating or estimating their value, and allocating a numerical amount to each item based on fair and current market value.

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