Franchise Royalty Fees: An In-Depth Look

Getting into business, either starting from scratch or franchising, will be a significant investment to get underway. The appeal of franchising is that your investment is lower with a quicker ramp up and earlier profit potential.  As a potential franchisee, it’s important to understand what all the fees are and how that will impact your bottom line.

The first payment you will make to your franchisor is the initial franchise fee. This is a one-time flat fee and basically the price of admission. This is the fee you pay to get into business and join the franchise system. This fee varies among brands from $5,000 to upwards of hundreds of thousands of dollars.

What are Franchise Royalty Fees?

Franchise royalty fees, or on-going fees, are standard in the franchising industry. They may also be called franchise management fees or service fees. Typically, royalties are a percentage of monthly gross revenue or monthly gross sales that the franchisee must pay. Or depending on the brand, they may choose to charge a fixed periodic amount like $500 a month; not dependent on revenue.

As you research franchise brands, you will discover that most royalty percentages are five to 12 percent of volume, or gross sales, but again, that varies among brands. In some cases, the franchisor may set a minimum amount, which must be paid regardless of whether your business is doing well.

Why Are Royalties Needed?

The franchisor relies on franchise royalty fees as a regular source of income for the franchise brand. Franchisees pay these on-going royalties in exchange for continued support.  Described in a Forbes article, royalties cover the “running costs” of providing support services to that particular franchise branch.

Franchise royalty fees are important price tags for both parties. For the franchisor it pays the bills for services provided to the franchisees. From the franchisee’s vantage point, the support is valuable but the royalty fee can end up being a big chunk of change doled out monthly.

Since fees are rarely negotiable, franchisees should be aware of all costs before signing the franchise agreement or contract. Remember, as a franchisee, you do want these fees, because that profit builds the overall brand providing you with support, new technologies and innovations. You need to make sure you understand your financial forecast by working the numbers prior to making a decision about a particular brand. Determine how much business you will have to do each month, minus the potential royalties to clear good margins. If you can hit those marks and the quality of support given by the franchise actually improves your business, then the formula works.

On the flip side, the cost of franchise royalty fees is a delicate balance for the franchisor.  While a franchisor needs to cover costs, they also want to be attractive to potential franchisees and not let high fees discourage would- be owners.

Royalties are disclosed in Item 6 of the Franchise Disclosure Document or FDD. This Item details the on-going and other occasional fees you may be required to pay to the franchisor while you are operating the franchise. These fees may be related to marketing, software and technology, late fees, renewal fees, transfer fees, and others. It is advised to seek the guidance of an attorney to read documentation from the franchise and clearly describe to you what terms and conditions mean—allowing you to make the best financial decision.

Franchisees will typically also see a line item for marketing fees. You will be required to participate in a brand advertising or marketing fund. As with royalty fees, this may be a set amount each month, or a percentage of revenue. Most marketing fees range from one to four percent. This fund is usually a a national program for the brand, but it can also have a regional or local market focus for your location.

Franchising with AAMCO

At AAMCO we are transparent about your franchise investment when you become an owner. We provide owners an attractive price tag with your total franchise investment ranging from $240,325 to $346,700. Part of our job to make sure you are financially sound to make the investment with us. We require you to have a net worth of $250,000 with $65,000 in Liquid Capital.

Our franchise royalty fees are calculated at 7.5% of total gross annual sales. That provides AAMCO franchise owners with:

  • An experienced support team that stands behind you to provide the tools, technology, and infrastructure to run your business.
  • A time-tested successful business model that gives you confidence in operating independently.
  • Rights to use the iconic AAMCO brand that has been a household name for more than 60 years.
  • Marketing support to attract and retain customers within your market.
  • Continuing education including ongoing coaching, and specialized training.

If the numbers add up for you and you are ready to be part of an iconic brand in the $300 billion dollar auto care industry, request information about opening your own AAMCO franchise.

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