royalty fees explained

What’s the cost of doing business? For some, it’s the fees paid for the privilege of operating an established brand franchise.

This article aims to move you toward reaping the benefits of the franchise model. Before deciding on your next investment, understand the different types of franchise royalty fees.

Let’s take a look at franchise fee vs. royalty fee and the various royalty fee payment models.

Franchise Fee

One-time payment made upfront to the business franchisor—person granting franchise ownership—for the rights to use their business trademark. Typically $20,000–$30,000, franchise fees cover the cost of selecting a site location, training, and getting the business operational.

Royalty Fee

Ongoing monthly fees paid by the business franchisee—the person buying into franchise ownership—and viewed as “membership fees.” These fees pay maintenance expenses, such as marketing, strategizing, and support. Royalty fees are the price of profiting from a company’s brand.

To make this make sense, let’s take a look at fees to start a BooXkeeping franchise. If you’re in search of a low-cost, lucrative investment, start with a bookkeeping business.

The terms and conditions of ownership determine how to calculate franchise royalty fees. They're established in what’s called an Intellectual Property Licensing Agreement.

Franchise Royalty Fee Payment Structure

Franchise agreements define the expected franchise royalty fee for a business. The payment structure for royalty fees depends on the business’s franchise model.

Here are possible ways for calculating monthly franchise royalty fees: 

Gross Sales

This method calculates the royalty fee as a percentage of gross sales. Expect monthly royalty fees between 5-12% depending on the type of business.

Fixed Percentage of Gross Sales

Franchisees pay franchisors the same rate every month. It doesn't matter if business was good or bad. Franchisees with higher sales profit from the fixed percentage fee because sales don't affect the rate.

Increasing Percentage of Gross Sales

Increases in higher traffic areas where the franchisor expects greater sales. This allows franchisors to charge a premium for franchisees to open in a busy part of town.

Decreasing Percentage of Gross Sales

Allows franchisors to charge a higher initial percentage fee. Once franchise sales reach a certain level, the percentage fee decreases. This works to incentivize franchisees to improve business performance.

Fixed-Rate

Differs from “Fixed Percentage” and charges a flat fee not dependent on gross sales. It benefits franchisors by allotting them a regular monthly amount. It’s disadvantageous for franchisees whose sales don’t generate enough profit to pay the fee.

Transaction-Based

Franchisees pay a fixed rate on every transaction instead of a monthly amount. Larger industries producing in bulk often use the transaction-based model.

Minimum Fee

Used in combination with a percentage fee. Allows franchisors to collect a minimum royalty fee even if it's higher than what the percentage fee dictates. Another tough one for franchisees with low producing gross sales.

Understanding Franchise Royalty Fees

Make an informed decision with the understanding of franchise royalty fees. They include a one-time franchise fee and a monthly royalty fee. Invest in a franchise that works for you.

Reach out to start a conversation with BooXkeeping and consider a low-cost bookkeeping franchise.