At first glance, it would seem ideal if a franchise does not require a royalty fee. And in fact, there are various franchise opportunities being offered today that do not have royalty fees attached. These opportunities would boast that all you’ll need to pay for is a lump sum that pays for your franchise, the start-up inventory and the start-up training. After that, all revenues would be yours. They would say that this is as it should be, and you are most likely to agree.
But should it really be so? A franchise royalty fee is actually the Franchisor’s (the owner of the whole franchise) share of your revenues. It is usually around 2% to 10% of your profits. And it is usually part of a franchise package that offers full-time and continual support to the Franchisee.
In a nutshell, the royalty fee pays for the value that a Franchisor gives the Franchisee when a franchise contract is engaged in by both parties. First of all, when a Franchisee buys a right to a franchise, he is buying a right to operate using a previously established, and thus known, business. The Franchisee no longer has to start from an unknown entity and build a brand. The brand is all a part of the whole package.
More important than brand, however, a franchise gives a Franchisee access to the operating system of the company. This operating system is composed of all aspects of business operations that have been tried and proven to be effective by the Franchisor. When you take up a franchise, you automatically gain experience that is very relevant to your own business operations through proper and continuous training.
The franchise royalty fee also covers the support that the Franchisor continually gives to the Franchisee. Support refers to immediate and constant access to consultants who can help troubleshoot problems for the Franchisee. This also refers to the advertising and marketing that the Franchisor does for the whole chain. The support system that your royalty pays for makes sure that you’re not left floundering.
In a franchise opportunity that has no royalty fee, you cannot expect to get all these benefits even if they were promised. The brand is the least that you could expect. But without the operating system and the support system that the royalty fee ensures you have, this wouldn’t count for much in the long run.
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