What’s the Best Royalty Fee Structure for My Franchise?

Most franchisors go the easy route and establish their royalty rate according to a percentage of the gross sales of a franchise, and usually collect the fees every week or month. If you are considering offering a franchise, you need to determine first how your royalty structure would be.

Below are some of the most common royalty structures or accounting to consider:

Fixed Gross Sales Percentage

With this arrangement, your franchisee must report their gross sales following making specific approved adjustments such as returns, taxes, etc. You calculate your royalty by using the set percentage to the franchisee’s adjusted total sales on a weekly or monthly basis.

Variable Gross Sales Percentage

  • Increasing percentage. Some locations or markets are more likely to enjoy higher profit than others. Because of this, some franchisors impose a higher royalty fee since they know that the franchisee could shoulder it.
  • Decreasing percentage. The franchisee would be required to pay a reduced gross sales percentage if they increase their total gross sales.

Some franchisors believe reducing the royalty rate for increased sales is reasonable since it provides an extra benefit for excellent performance and acceptable returns for everyone involved.

Minimum Royalty

  • Fixed fee. This fixed royalty fee will not be impacted by unit sales, with you being assured a fixed amount every month, while your franchisee is receiving the full benefit of their increased sales.
  • Minimum fee. There are specific markets or situations in which franchisors wish to enforce financial performance standards on franchisees to make sure that they satisfy minimum performance standards.

A minimum royalty fee in these situations would be easier than other ways franchisors could use for measuring market performance or penetration.

Transaction-Based

This kind of royalty structure is common in industries such as the hospitality industry. With this structure, let us say you own a hotel chain; your franchisee would pay you a royalty fee based on every single reservation booked via your central reservation system.

You need to take ample time to research your options, weigh all the pros and cons of each structure, and then determine the best royalties accounting plan to monitor your royalties.