Royalties are the lifeblood of what makes the franchise machine work. Franchises should be prepared to pay out between 5% and 10% of gross revenues. This expense is well worth the price and I will explain.
At the end of the day the customer pays for everything, including the royalties, franchise unit overhead, all expenses, employee's salaries, and the Franchisee's profit. Which begs the question, how does the customer really factor into the equation? The answer is: the customer is everything.
Royalties are not all that bad. The more royalties the franchise company receives the more franchise opportunities will come the franchisee's way. Despite the royalties, the franchisee still keeps the majority of the profit. As each Franchise continues to contribute royalties, keeping the flow of lifeblood moving, the systems keeps on moving and the stacks of profit will too.
The Franchisor's royalty is based on a success strategy and system the franchisee can forgo, allowing time spent on more pressing issues in particular to the business. The kickback, in the form of a royalty, can be explained in another way as a blend of these four elements of franchising: Company Brand, Operating System, Support System, and Franchisee. Companies fail on a regular basis because of not having a strong presence in each area above. Essentially for a petty price, prime elements of running a successful business are done for you.
Brand - The gut reaction, connotation, or meaning experienced after having a personal experience with a product or service.
Operating System - institutionalizes the service delivered as a function of a success script offered to all units of a franchise.
Support System - Aids the franchisee in becoming more profitable and effective year after year to reach performance goals.
Franchisee - The Individual contributions given to the franchise as a whole from the entrepreneur starting a new location
The Franchisor provides professional advice to the franchisee from consultants in the fields of marketing, management, advertising, execution of delivery, customer support, etc. The remittance given by the franchisee is far less than the amount necessary to pay for the consultants.
The Franchisor also provides necessary purchasing power to be successful. It is often true that a Franchisee can buy products and services at a greatly reduced price by being part of a Franchise System. It would be very reasonable to deduct these savings annually from the royalties paid to come up with a bottom line number to come up with an accurate savings
Most royalties range from 5% to 10% depending on the type of franchise system. As long as the Franchisor's systems contribute 10% or more to the lifeblood of the business don't fret about remitting royalties.
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Winters Franchise Consulting & Brokerage is a licensed affiliate of The Franchise Alliance, Inc the leading network of Franchise Specialist in the United States. We have helped people throughout the United States and Internationally find the right franchise or franchise opportunity for them. Visit http://www.franchisinginutah.com for more information.
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