With the Chartered Professional Accountants of Canada...
Royalty fees are an important part of starting up and maintaining a franchise. The franchiser usually collects a set amount of money in order to allow that franchisee to take advantage of the brand name, the trademark and even the operating system. Everyone benefits from being attached to a larger brand name that tends to attract attention. Customers gravitate to brands that they are familiar with and this leads to increased revenue for each branch of the franchise.
The royalties collected are used in a variety of different ways, including setting up and infrastructure for the company as a whole. The collective money is spent in a way that benefits the brand as a whole and each of the separate franchise branches. For example, the funds are often used to establish more buying power, setting up local field support and even training programs for new franchisees. Royalties ensure that a brand is able to continue training programs and research new ideas associated with the franchise.
Each brand determines its own royalties with the goal being an amount that is both affordable and still enough to keep everything going. There is no one set amount that every franchise charges, but most do require monthly payment based in some way on the individual branch's gross sales. As a general rule, retail franchises tend to range from five to six percent. A franchisee needs to understand how royalties work for their individual franchise.
When it is tough to determine the sales of a specific branch, a franchise may resort to a flat royalty fee from each branch. Some see this as a positive aspect of the specific franchise because of the consistency. On the other hand, critics of the policy admit that with set royalties being collected, there may not be enough of an incentive for franchisees to continue to grow and promote the business.
Still others may skip over the collection of royalties in favour of a percentage of the sales of a certain product. This often works well when it comes to companies like gas stations. It makes more sense for the franchise to request an amount that corresponds to the amount of gas and other products sold each month. Car dealerships are often set up in a similar way.
Each franchise sets its own royalties and typically requires the same amount, whether it is a set dollar figure or a percentage, from each branch. This helps to avoid conflicts within the brand between different franchisees. When a brand begins to grow and requires more internal support, there is a chance that the royalty amount will increase to support these changes.
The cost of royalties should be figured into every business plan, but the benefits also need to be taken into consideration. A franchisee gets the necessary support and training from the brand as well as an internal system that supports everything from the name and trademark to the computer system.
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