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How to be a Successful Franchisee - Start With Royalties

Franchisees preparing for success should know their rights and understand the legalities of franchising from the start. One key component to consider is royalties.

Royalties are payments made to the franchisor in exchange for the rights to use their intellectual property, business model, and expertise. Since these payments can vary greatly, it's important that franchisees understand exactly what the royalty fees cover and how much they will be required to pay.

Whether you're an unhappy franchisee or are considering investing in a franchise (a prospective franchisee), this article will provide a comprehensive legal guide on royalties, and some tips on how to put yourself in the best position to become a successful franchisee. We'll discuss their various components and factors to consider when negotiating a royalty agreement with your franchisor. We'll also look into payment methods, common mistakes made by franchisees when calculating royalties, and what you can do if your franchisor is charging too much.

Understanding Franchisee Royalties

One of the primary reasons aspiring entrepreneurs start a franchise business is to capitalize on the brand recognition and marketing advantages of an existing company. But that doesn’t come without a cost. As with any business venture, there are startup costs, and whenever you enter into a franchise agreement, one element that can’t be overlooked is understanding the agreed-upon royalties.

Royalties are financial payments owed to the franchisor. They can be paid as a fixed fee or as a percentage of gross sales, and they are automatically deducted from your monthly sales earnings. The amount of royalties will depend largely on your franchise agreement—always make sure you read through it thoroughly before signing it so there’s no confusion between you and the franchisor about what you owe and what you’re getting in return for it.

By understanding your obligations up front, you can plan for how much money will be owed to the franchisor each month (and budget) accordingly so that any surprises down the line can be avoided. If you have questions about royalties or want more information about what they mean for your business, don’t hesitate to contact your franchisor or seek out legal guidance from an experienced attorney familiar with franchise law.

Factors That Affect Franchise Royalties

Royalties are the fees franchisees pay in exchange for the franchisor's use of their trademark, brand and system. As you consider whether franchising is right for you, it's important to understand the various factors that contribute to the amount of royalties you may be expected to pay.

Some of these factors include:

  • The size of your franchise location: Franchises with a larger space typically pay more in royalties than those with a smaller footprint.

  • Your location: The cost of living in an area can play a role in royaties. For example, franchisees located in urban areas might be asked to pay higher royalties than those located in small towns.

  • Your sales volume: In many cases, royalties are calculated as a percentage of sales revenues. This means that franchises with higher sales volumes may end up paying more in royalties.

  • The type of franchise system: Franchise systems can range from low-cost/low-royalty to high-cost/high-royalty models. Generally speaking, retail and restaurant franchising tend to be on the high end while service franchises are often on the lower end.

It's important to understand all these factors before signing on as a franchisee so that you know what kind of royalty payments will be expected down the line.

Reasons Why Franchisees Might Be Unhappy With Royalties

If you're unhappy with your franchise's royalty fees, you may be able to negotiate a better rate. But, before you do that, it's important to know why you may be feeling unhappy about your current royalty fees. Here are three reasons why franchisees might not be happy with the royalties they pay: