skip to content
blog home Start a Franchise Start-Up Franchisors: What is the Right Franchise Fee and Royalty Structure for Your System?

For the start-up franchisor (and even established franchisors) determining the appropriate franchise fee and royalty structure for your franchise system is a critical task that will have long standing implications. The fee structure that you establish will serve as the primary source of revenue for your franchise system and will represent one of the most significant expenses and obligations on the part of your franchisees. Set the fees to high and you risk franchisee and, ultimately, franchise system failure. Set the fees too low and you risk franchise system failure resulting from your inability (as the franchisor) to properly support, develop, and expand your system.

The process of establishing your franchise fee and royalty structure should not be based on a rigid formula or a formula that simply duplicates the fees charged by your perceived competitors. Rather, your franchise fee and royalty structure should reflect the unique characteristics of your business, the sophistication of your existing business systems, the strength of your trademarks and your future obligations to maintain, develop and refine your franchise system and the rights of your franchisees.

When establishing these fees, some of the critical factors/principals that you should be considering, include:

The Initial Franchise Fee Should Reflect the Value of Your Existing System(s)

In many respects the initial upfront franchise fee that you will charge to your franchisees should reflect the value of the existing system(s) that you have already established. Higher franchise fees are usually predicated on valuable, well established, and tested systems and intellectual property assets. In making this assessment, consider:

(a)  The legal strength of your trademarks and their USPTO registration status;

(b)  The strength and recognition of your trademarks and trade dress by consumers in the marketplace;

(c)  The competitive advantage(s) that will be afforded to your franchisees by your established business systems, products and services, including unique products and sources of supply.

The Initial Franchise Fee Should Reflect Your Initial Training Obligations

The initial training of your franchisees will play a significant factor in the development of your franchise system and the success of your franchisees. Your initial franchise fee should reflect and give consideration to the initial training obligations that you will be undertaking as you add each franchisee. Your franchise fee must be sufficient to ensure that you possess the necessary financial resources and systems to properly train your franchisees.

Your Royalty Structure Should Reflect Your Business and be Geared toward Franchisee Success

The relationship between franchisor and franchisee is one of interdependence.  That is, to be a truly successful franchisor, you need successful franchisees. When structuring the ongoing royalty obligations of your franchisees, consider:

(a)  Successful franchise systems require successful franchisees, so ensure that the ongoing royalty rate reflects the economics of your individual franchise units and does not inhibit franchisee profitability;

(b)  Royalties must be sufficient to support and pay the expenses associated with your current and ongoing efforts and obligations to continuously refine, develop, recreate, and protect the core components of your franchise system. As a franchisor you will possess some serious and necessary obligations respecting the continued development and refinement of your franchise system. This is a serious obligation and your royalty structure must be sufficient to properly fund these activities;

(c) Your royalty structure should reflect your business.  Although the typical or predominant royalty structure is based on a fixed percentage of gross sales, start-up (and even current) franchisors should consider possible alternatives that may  better reflect the unit economics of their franchisees.

Related Articles:

By admin January 18, 2016

Franchising Guides

The Ultimate Guide to Franchising Your Business

New to franchising? Do you want to learn more about franchising your business, where to start, the steps, and how to know if you are doing it right?

Learn More

Is Your Business Franchisable and Should You Franchise?

Franchising may be the next big step for your business and represents an opportunity to grow your brand. So, how do you know if franchising is right for you? How do you know if your business is franchisable and, if it is, whether or not you should franchise your business? To answer these questions you must evaluate whether or not your business is franchisable and, if it is, whether or not your individual goals and your business goals align with franchising and establishing a franchise organization responsible for on-boarding, training, and supporting franchisees.

Learn More

Licensing Vs. Franchising

When considering expanding a business both franchising and licensing are possible options. Each option however comes with different rules and regulations. Prior to moving forward with franchising a business or licensing a business it is important to understand the differences and how each may have an affect on you.

Franchise Lawyer Charles N. Internicola wrote “Licensing versus Franchising” for the very purpose of allowing successful business owners to understand the difference between licensing a business and franchising a business.

Learn More

Guide to Selecting a Franchise Lawyer

If you have questions about franchise lawyers, what they do, how they can help, the cost, and how to select the right franchise lawyer for you, then this guide will help.

Franchise lawyers advise and represent individuals and businesses on legal issues that involve franchising a business, preparing an FDD, filing and renewing FDD registrations, buying a franchise, and litigation involving the franchisor and franchisee relationship. The role of a franchise lawyer varies depending on whether he or she represents the franchisor or the franchisee.

Learn More

Item 19 Financial Performance Representations

Check out our guide where we discuss how to plan and properly disclose Financial Performance Representations in your FDD.

Learn More

Franchise Sales Compliance Guide

Are you a franchisor or a part of a franchise sales team? Do you want to learn more about franchise sale compliance and ensure that your sales practices comply with franchise laws and are consistent with best practices? Then this guide is for you.

In this guide you’ll learn the fundamentals of franchise sales compliance including the franchise laws, regulations, and best practices that your team should have in place for every franchise sale.

Learn More
Close Overlay

Let’s Talk

With services to make your growth strategy simple, cost effective, and with a team excited to help you, let’s talk about how we can help grow your business.

Fill out the following form and we’ll contact you as soon as possible. To reach our team directly, give us a call at (800) 976-4904.