Royalty Fee

Why Do I Pay A Royalty Fee?

The first point to make about Royalties is that good Franchise systems should look at them not as a payment but rather as a remittance. It is the Franchisor's share of the income derived from customers or clients. The Franchisee collects that fee along with all other revenues from the customer.

It's an important concept because it emphasizes that the customer ultimately pays for everything, including the Franchisor's royalty, the Franchisee's overhead, all costs of sales, employee's salaries, and the Franchisee's profit. Therefore it's all about the customer - as it should be.

The Franchisee should want the Franchisor to earn a significant amount of royalties because that's really the oil that makes the engine run. Each Franchisee collects and remits a small portion of that oil to the Franchisor. All elements of the system can continue to improve as long as the royalty stream is strong.

The Franchisor's royalty will be based on the fact that they have provided a system and strategy that has ultimately served the customer. The Franchisee delivers that system to that customer. The royalty represents the Franchisor's share based on the various parts of the Franchise system, which has four elements.

The four elements of a Franchise are:

a. Brand

b. Operating System

c. Support System

d. Franchisee

Brand - the name associated with the services delivered in a memorable and satisfying experience to the customer

Operating System - institutionalizes the excellent service delivered in a memorable experience so it can be done over and over again from Franchise to Franchise in a consistent manner

Support System - helps the Franchisee get better and better at delivering the service in a memorable experience - helps a Franchisee improve their performance

Franchisee - the individual motivations or reasons for being in a good system, as well as the talents and experience delivered to the business.

The...