Where Do Franchise Royalties Go?

When you are investigating Canadian franchises, the financial commitments of the options available are definitely a major factor in your decision process. There is more than one type of fee involved in owning a franchise, but one common fee type is the royalty.

Unlike the one-time initial startup costs, the royalty is something you will pay on an ongoing basis for the entire time you own the business. The franchisor uses money collected from royalties to profit and invest back into the system. Before you invest in any franchise, it's crucial you understand how the brand's royalties work.


The fee will vary

Royalty fees and payment timetables vary by brand. This fee is often paid on a monthly basis, and according to Canadian Franchise Magazine, the cost can range from 0 percent to 20 percent of your gross monthly sales. Generally, the more involved a franchisor is, the more your royalty will be.

Some brands use a flat royalty fee instead of a percentage, especially if it would be difficult for the franchisor to monitor your monthly sales. While this can be attractive since you know what your royalty fee will be in advance, it can lead to a franchisor with less motivation to help franchisees boost sales.


What you receive for your royalty

The fees from a royalty are your franchisor's income and cover their overhead. It also provides them with funds to reinvest into the system in areas such as technology, point-of-sale systems, new product or service development, and the marketing needed to grow brand recognition or the system itself.

It can be challenging knowing that you will pay this ongoing fee to the franchisor on a consistent basis. However, this is part of joining a franchisee, and what you receive for your royalty should more than justify the cost if you have joined the right brand. Since you will have a proven system to follow from the franchisor, there is a lower chance of you making crucial mistakes. You'll also have access to support, guidance and purchasing power as part of a larger franchise system.

When it comes to royalties, it is important to know just what a brand's royalty structure is and how they use those funds before you join. If, for example, a chunk of your royalty will go into a master advertising fund, check into the brand's level of national and local advertising. If you find that a franchisor does not seem to be spending its royalty dollars wisely, think very carefully before becoming part of that system.