Learn everything you need to know about franchise royalty fees and where the money goes. Depending on the franchise, sometimes franchise royalty fees can be negotiable.
What Are Franchise Royalty Fees?
Simply put, they’re a percentage of your revenue that you pay to the franchisor in exchange for the right to use their brand name, products, and systems. In other words, it’s the cost of doing business as a franchisee.
Franchise royalty fees typically range from 4%-8% of your gross sales but can be as high as 12% or more, according to the Small Business Association. The exact percentage will vary depending on the franchisor and the industry. For instance, a food franchise is typically a high-volume business, which means a lot of customers purchase a lot of individual items. Because their revenues tend to be higher than other industries, they typically have a lower royalty fee percentage.
In contrast, another type of business, like a consulting franchise, doesn’t experience as high of a revenue volume, so their royalty fee percentage may be 10%. Then others fall in the middle, such as senior in-home care franchises such as A Place At Home.
Depending on the agreement, you’ll report your gross sales to the franchisor every month or quarter. They’ll then deduct the agreed-upon percentage from your revenue, leaving you with your net sales. Some franchises may charge a flat fee instead of a percentage, while others may have various rates for different types of products or services. In some cases, the franchisor may also require you to pay additional fees, such as marketing or technology, on top of the royalty fee.
It’s important to note that royalty fees are not the same as the franchise fee. Franchise fees are a one-time payment you make to the franchisor when you first sign on, whereas royalty fees are an ongoing cost.
Why Do I Have to Pay Royalty Fees?
As a franchisee, you’re essentially buying into a proven business model. The franchisor has already worked hard to develop a successful brand, create effective systems and processes, and build a customer base. You’ll get the right to use the franchisor’s brand name and logo, which can be a considerable advantage in a crowded marketplace. Perhaps most importantly, you get ongoing support and training from the franchisor, which can help you succeed in the long run. You’re essentially paying for the right to use all that hard work and leverage it will better position yourself for success than starting from scratch.
Are Franchise Royalty Fees Negotiable?
Franchisors are typically reluctant to negotiate their royalty fees, as they’ve already set them at a level they believe is fair for both parties. However, if you have a strong case for why you should pay less, it’s worth bringing it up with the franchisor and seeing if they’re open to negotiation. For example, if you believe you’re opening a less profitable location, they may lower the royalty expenses.
It’s also worth noting that some franchisors may offer discounts on royalty fees for specific situations, such as if you open multiple locations or are a veteran. Other franchisors, like A Place At Home, offer a sliding royalty fee structure. So, the more revenue you earn in one year, the lower your royalty percentage is. Their current royalty structure is as follows:
- 5% – up to $999.99
- 0% – $1 million to $1.5 million
- 5% – + $1.5 million in sales
If you’re looking to try to get out of paying royalty fees altogether, don’t bother. These fees are a crucial part of the franchise business model and are typically a percentage of your gross sales. They provide the franchisor with ongoing revenue and help to cover the costs of continuing support services, such as marketing, training, and operations. While some franchisors may be willing to negotiate their royalty fees, it’s unlikely that you’ll be able to avoid paying them entirely. So, when considering a franchise opportunity, be sure to factor in the cost of royalty fees to ensure that it fits within your budget.
Red Flags to Watch for With Royalties
While lower royalty fee rates are great, experts at Forbes warn that if a franchisor is pushing for higher up-front costs with significantly lower royalty rates, that’s a red flag. This can be a sign that the franchisor is just looking for short-term cash flow and that they might not provide the best ongoing support.
You should also be suspicious if the franchisor is too eager to offer discounted royalty fees. Forbes says there are some sufficient reasons why they might offer reduced royalty fees, such as being a new franchise or trying to get a specific market to sell. But otherwise, if an established brand is overly willing to offer you a discount on their royalties, experts say it could be a sign they’re in financial trouble and need to sell territories.
Affordable Senior Care Franchise Opportunity: A Place At Home
Our senior-focused franchise offers various services for seniors who want to age in place, find a living facility when it comes time for extra assistance, and help facilities keep their staff numbers at the required amount. Along with our other home care franchise costs, we keep our royalty fees lower because we believe in supporting our franchisees and helping them grow their businesses. As mentioned above, we lower the rate as you earn more revenue. Experts cite the industry average for royalty fees as 5%, so our top performers are actually paying lower than the industry average.
A Place at Home is committed to helping our franchisees succeed by providing affordable and flexible royalty fees and ongoing support and training. By doing so, we believe we can build a strong network of franchisees passionate about providing quality care to seniors in their communities.
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