All you need to know about Franchise Fee & Royalty Fee in the Franchise Business
Fortune Franchise May 4, 2021
For the first-time franchise owners and those who have an idea to buy a franchise business, the world of franchise costs can be confusing!
What is a franchise fee? What is a royalty fee? What they covered? And why should I pay the franchise fee? Why it is important and necessary?
So, this article deals with everything you need to know about franchise fee & royalty fee, demystifying about franchise cost, and given clarity about those questions:
What is a Franchise Fee?
A franchise fee is an initial amount that pays to the company to make use of the brand name, and its resources.
The company’s franchise disclosure document (FDD), has clear mention of the franchise fee details.
Signing an agreement and paying the fees allows you to use the franchisor’s business system and/or products.
Factors Used To Determining the Franchise Fees
There are many factors are used to determine the fee, it includes:
- Uniqueness
- Complexity of the system
- Profitability of the business
- Expected return of investment (ROI)
- Cost of development of company
- Company ‘s acquisition and granting franchises
Why It Is Important To Pay A Franchise Fee?
Every company and franchisor deserves to charge a franchise fee and it is the duty of franchising to pay that, it is not for the company’s profit, it’s for your profit.
- Paid for the brand value – Franchise businesses eliminate incurring expenses because they are already established brands. Company presence both online and offline. More importantly, the brand is already known to the people and the internet.
- Putting money on the table – It makes franchising value and more accountability yourself.
- Ongoing training & Support – Company gives comprehensive training and support that advances you on right track.
Difference of Initial Investment and Franchise Fee
The initial investment is more extensive than the franchise fee and gives a more comprehensive look at the entire investment a prospective franchisee would need to make. According to the FTC Franchise Rule, “estimated initial amount needed to cover all the expenses a franchisee needed to start the business. This includes the opening inventory, rent, security deposit, signage, initial training, and other costs”.
What Is A Royalty Fee?
A Royalty fee is an amount, franchisee pay to the franchisor after buying into a franchise for “ongoing support”. It is a fee that is paid on a regular basis that varied from the franchisor/ company (monthly, quarterly, or fixed period).
Why It Is Important To Pay Royalty Fee?
- Ongoing Support: Ongoing royalty fees are how the franchisor makes money, although that money is reinvested to the business to support franchisees that help the development and growth of the brand.
- Exchange of Value- Training: Company focuses on giving training on a consistent basis to run the business successfully and profitably.
- Grow together (win-win): In the ecosystem of franchising, franchisor & franchisee are just like one player to scale up the business together.
A royalty fee is one of the most crucial elements of the franchise system that also makes benefitted for both franchisor and franchisee.
What would happen if you don’t pay the fees?
Non-payment of franchise fees and royalty fees has some critical consequences. You could lose your franchise business or be subject to other legal action.
In order to operate a franchise, franchisee fees are mandatory & must pay to the franchisor that delivers proven benefits to both the franchise organization and individual franchisees.
At fortune franchise, we have highly qualified franchise consultant experts who guide you from scratch to help you successful franchise business.