For those researching a franchise business, there are a number of concepts that might be new. In this article we discuss the concept of franchise royalty fees. So, what is a royalty fee?
Franchise royalty fees are ongoing payments made by a franchisee (the individual or entity that owns and operates a franchise location) to the franchisor (the company that owns the overall brand and franchise system). These fees are typically calculated as a percentage of the franchisee’s gross sales or revenue and are paid periodically (usually monthly but sometimes weekly depending upon the franchise) as part of the franchise agreement.
At Belvoir group, our term for these royalty fees is the Management Service Fee (or MSF) which helps to better explain its purpose. We’ve used the word ‘franchising royalty fees’ in this article as this is a question that we are commonly asked by people who want to learn more about franchising & it’s a more generic term that’s used in the franchising industry. We’ve included some specific information on what our management service fee contains in the section below.
Why do franchisees pay royalties?
Royalty fees are a payment to the franchisor for their resources & support services. These services help the franchisee to run a business whilst being able to focus on what they do best within that business. Typical services include:
- Use of the franchisor’s brand name, trademarks, and logo
- Access to proprietary systems, processes, and business models
- Ongoing training and support for the franchisee and their staff
- Marketing and advertising assistance
- Research and development of new products or services
Within the Belvoir Group, Management Service Fees cover a range of support services including:
- Business development – all franchisees have access to their own business development manager who can help the franchisee’s business to grow
- Training – our training programme has 42 course helping franchisees stay on top of their professional development and train new staff
- Premises coordinators – your premises co-ordinator will assist you with all matters relating to your commercial premises
- Legal support – franchisees have access to our legal team who provide support with compliance & legislation covering anything that crops up from when a franchisee first opens an office to GDPR compliance of customer data
- IT support – our team handles the setup of email systems & support with the franchisee’s presence online
- Finance – the finance team advise franchisees who are looking to expand
- Marketing – we have an experienced marketing team that provide compelling templates for a range of marketing materials as well as creating national brand awareness to help franchisees gain more business
- Audit & compliance – franchisees get the benefit of an annual compliance check which helps to ensure that they are running a compliant business
In return for a franchise royalty fee, the franchisee gets access to a wide network of expertise. Instead of having to employ people with different specialisms or seek out professionals in a wide range of fields from marketing to legal, to commercial premises to business development, they get to use the expertise provided by the franchise.
How much is a typical royalty fee?
The exact percentage and payment terms of royalty fees may vary depending on the franchise agreement and the specific industry, but they may typically range from 10% to 14% of the franchisee’s gross sales or revenue.
What is the difference between a franchise fee and a royalty fee?
The franchise fee and royalty fee are both components of a franchise agreement, but they are different fees, serve different purposes and are structured differently. Here’s an outline of what they are:
Franchise Fee: A franchise fee is a one-off, upfront payment made by the franchisee to the franchisor when entering into a franchise agreement. This fee essentially grants the franchisee the right to use the franchisor’s brand, trademarks, and business system for a specified period of time or in a particular territory. The franchise fee may cover initial training, support, and assistance in setting up the franchise location. Franchise fees can vary widely depending on the franchise system and industry, but they typically range from a few thousand to several hundred thousand dollars.
Royalty Fee: A royalty fee is the ongoing payment made by the franchisee to the franchisor throughout the term of the franchise agreement. Royalty fees are typically calculated as a percentage of the franchisee’s gross sales or revenue and are paid periodically (usually monthly or weekly).
How does the royalty fee affect a franchise?
The royalty fee is a significant factor that affects various aspects of a franchise, impacting both the franchisee and the franchisor. Here are some ways the royalty fee can influence a franchise:
Franchisee’s expenses and profitability: Royalty fees are an ongoing cost for franchisees and can have a direct impact on their profitability. A higher royalty fee might reduce the franchisee’s net income, while a lower fee could make the business more profitable. Franchisees should consider the royalty fee structure and percentage when evaluating a franchise opportunity to ensure it aligns with their financial expectations.
Quality of support and services: Royalty fees provide franchisors with a steady income, which is often used to fund the support, training, marketing, and other services offered to franchisees. A reasonable royalty fee can help ensure that the franchisor has sufficient resources to invest in the franchise system and maintain a high level of support for franchisees.
Franchisor’s revenue and growth: Royalty fees are a primary source of revenue for franchisors. A well-structured royalty fee system can encourage the growth and expansion of the franchise network. By collecting royalty fees, franchisors can reinvest in the business, develop new products or services, and stay competitive in the market.
Relationship between franchisee and franchisor: The royalty fee structure can influence the relationship between franchisees and franchisors. A fair and transparent fee system can foster a healthy partnership, while an unreasonable or unclear fee structure might lead to dissatisfaction and disputes.
Attractiveness of the franchise opportunity: Prospective franchisees will consider the royalty fee as part of their overall assessment of a franchise opportunity. A franchise with a reasonable royalty fee structure and a strong support system may be more attractive to potential investors.
In conclusion, the royalty fee affects various aspects of a franchise, from the franchisee’s profitability to the franchisor’s ability to support and grow the franchise network. Both parties should carefully consider the royalty fee structure to ensure it’s fair, transparent, and mutually beneficial.
How is the royalty fee calculated?
The royalty fee is calculated by multiplying the franchisee’s gross sales by the royalty fee percentage.
For example, if the franchisee’s gross sales are £80,000 in a month & their franchise fee is 11% the calculation would be £80,000 x 0.11 = £8,800
Depending upon the franchise the royalty fee frequency may vary. Franchisees usually pay royalty fees on a regular basis, such as weekly, monthly, or quarterly, as specified in the franchise agreement.
Are franchise royalty fees negotiable?
Franchise royalty fees are generally not negotiable because they are a standard component of the franchise agreement and are set by the franchisor to ensure consistency across the franchise network. However, there may be some rare exceptions where a franchisor is willing to negotiate the royalty fee structure under specific circumstances or for particular franchisees.
It’s essential to understand that the royalty fees are designed to support the franchisor’s ability to provide ongoing resources, training, marketing, and other services to franchisees. A consistent royalty fee structure helps maintain a level playing field among franchisees and supports the overall growth and stability of the franchise network.
While royalty fees are usually non-negotiable, other aspects of the franchise agreement might be negotiable, such as the initial franchise fee, territory size, or lease terms for a physical location. It is always advisable to consult with a franchise lawyer or consultant when entering into a franchise agreement to ensure that you fully understand the terms and conditions and explore any possible negotiation points.
Do royalty fees change?
Royalty fees are typically set as a percentage of the franchisee’s gross sales or revenue in the franchise agreement, and this percentage usually remains constant throughout the term of the agreement. However, there are a few situations in which royalty fees might change:
- Changes in the franchise agreement: If the franchisor decides to amend the royalty fee structure or percentage, they may require franchisees to sign a new franchise agreement or an addendum reflecting the change. In such cases, the franchisor must provide adequate notice and may need to obtain the franchisee’s consent, depending on the terms of the original agreement.
- Performance-based royalties: Some franchise agreements may include a performance-based royalty fee structure, where the percentage changes depending on the franchisee’s sales or revenue levels. For instance, a franchisee may pay a lower royalty fee percentage if they achieve higher sales volumes.
- Temporary promotions or incentives: Occasionally, franchisors may offer temporary promotions or incentives to franchisees, such as reduced royalty fees for a specific period, to stimulate growth or support struggling franchisees.
- Changes in laws or regulations: Changes in tax laws or other regulations might indirectly impact the royalty fees that franchisees pay to franchisors.
While changes to royalty fees are not common, it is crucial for both franchisees and franchisors to carefully review the franchise agreement and stay informed about any potential adjustments to the fee structure.
How long are franchise royalties paid?
Franchise royalty fees are paid for the duration of the franchise agreement, which typically ranges from 5 to 20 years. The specific length of the agreement and the terms for royalty fee payments will be outlined in the franchise contract.
Royalty fees are usually paid on a regular basis, such as weekly, monthly, or quarterly, and are calculated as a percentage of the franchisee’s gross sales or revenue. As long as the franchise agreement is active and the franchisee continues to operate the franchise, they are required to pay royalty fees to the franchisor.
When the franchise agreement comes to an end, the franchisee may have the option to renew the agreement for an additional term, subject to the franchisor’s approval and the terms set forth in the renewal clause of the agreement. If the franchisee renews the agreement, they will continue to pay royalty fees for the duration of the renewed term.
If the franchisee decides not to renew the agreement or if the franchisor chooses not to renew it, the franchisee must cease operations and will no longer be required to pay royalty fees.
Are royalty fees tax-deductible?
Yes. Belvoir Group is based in the UK and royalty fees are tax-deductible as they are a business expense. This is generally the case worldwide.
Further Information
If you have any questions about franchise fees or if you are interested in learning more about becoming a property franchisee & starting an estate agent franchise, please take a look at our Become a Franchisee page.
