There are lots of benefits to becoming a franchise owner. For one thing, you’ll be starting a business that already has an established brand and way of doing things, making it much more likely that it’ll succeed than simply opening a brand new business would.
However, there are downsides to owning a franchise too, because you’ll also be giving a percentage of the franchise’s revenue to the franchisor that allowed you to set up an outlet for their brand. But what percentage of revenue do franchises keep?
The short answer is that it depends. The ongoing sums that a franchisee pays to a franchisor are known as a “royalty fee”, and it’s often charged at a fixed period. Sometimes it will be a fixed sum royalty fee, but more commonly it’ll be a percentage of the turnover (or the gross profit) that the franchise is making.
This percentage varies – it can be anything from 5% to 50%. However, there’s a lot more to learn about the percentage of revenue that franchises get to keep, and we’ve got all the answers for you in the article below. Read on!
What Percentage Of Revenue Do Franchises Keep?
As you might expect, a franchise has to pay a certain amount of its revenue to the franchisor. This is known as a “royalty fee” and it’s done for a number of reasons, which we’ll explain in the next section. However, when it comes to royalty fees there is no set rule for how much a franchise has to pay, and instead it will depend entirely on the franchisor and the situation.
On the whole, though, there are two ways that a franchise royalty fee is calculated.
The first is as a percentage of the franchise’s turnover or of its gross profit. A franchise’s turnover is how many net sales they have generated, while a gross profit is the amount that they’ve earned once all the expenses have been charged against the net sales.
The typical percentage for franchisor’s to take is about 5% or 6%, which means that the franchise is keeping about 95% of its revenue. However, the franchisor can also take a lot more, and the percentages can vary even up to 50% or more of the revenue.
It all depends on the franchisor in the situation, or the type of industry that they’re working within. How frequently the franchisor takes this percentage also varies. It will be a fixed period, which could mean that they’re taking it every month, every quarter, or another measurement of time.
Alternatively, a franchisor may have its royalty fee be a fixed sum. This means that they will take a set amount of money every fixed period, regardless of how much gross profit or turnover the franchise has made.
This could be a difficult set up for the franchise, since they will struggle to pay a fixed amount if they’ve had a particularly bad sales period.
The Third Way
Although we’ve said that there are two ways that franchisors collect royalty fees, there is technically a third way that they get their money – but it’s not really a royalty fee.
In some situations, a franchisor will make their franchises buy all the products and services from them, but they charge them at a markup. This is how they make their money from them.
This isn’t going to be the most common approach, and again there is no set amount of money that the franchise is paying or keeping, it all varies on the brands.
Why Do Royalty Fees Exist?
There are a few reasons for why a franchisor charges its franchisees a regular royalty fee. For one thing, it gives the franchisor a regular source of income. If a franchisor has loads of franchises underneath it, but they’re not getting any of their money, they’re not going to be generating a proper income as a whole business and they’re going to struggle.
The other reason for royalty fees is that it helps to cover the costs of the franchisor helping out the franchisee. These are running costs, the amounts of money that it takes to provide service to the franchisee. For example, the franchisor will spend time guiding the franchisee, perhaps even visiting the branch and seeing how things are going first-hand.
On top of that, the franchisor might spend time organizing important things for the business, like getting particular repair people in to fix things or negotiating leases and rent. They will also be involved in fitting the franchise out with the right equipment, keeping it regularly updated, and so on.
As you can see, there is lots that a franchisor may do for the franchise, and so it’s understandable that they need some money in return.
The Importance of a Fair Royalty Fee
However, it’s extremely important for the royalty fee to be carefully calculated and fair, for both franchisee and franchisor. For the franchisee, it needs to be a royalty fee that allows them to still grow as a business and profit. If the royalty fee is taking too much of their income each fixed period, then the franchise isn’t going to be able to grow financially.
On top of that, the royalty fee needs to be enticing to potential franchise owners. If somebody is considering becoming a franchise owner for a particular brand, then they will want to find the royalty fee fair and encouraging – they’ll want to know their business will be able to succeed.
If the royalty fee is too high, then they’ll not want to go into business with the franchisor. However, the royalty fee also needs to work for the franchisor. The sum will need to allow their overall business to grow, as well as cover all their costs from helping to set up and guide the franchise.
Somewhere in the middle of all these factors is a royalty fee that is fair and benefits all parties, and that fee needs to be carefully calculated before everyone goes into business with each other.
What Percentage Fee Do Most Franchisors Go for?
Earlier on, we explained that a franchisor can take its royalty fee as a percentage. However, this percentage could either be of the franchise’s turnover or their gross profit. These are two very different figures, and the most popular with franchisors has proven to be that of the franchise’s turnover.
The main reason for this is that it’s easier to keep track of. When you’re taking a percentage of a franchise’s turnover, then it’s going to be a figure that you should easily have already. However, if it’s a percentage of a gross profit, then the gross profit has to be properly calculated first.
This takes time, as well as money because you’ll need to hire a reliable accountant to do more work. However, this approach is actually worse for the franchisee. It can often be the case that their gross profit is going to be a number that works better for them, and so they can suffer under this approach.
How much revenue a franchise keeps can vary depending on the franchisor.