How To Get A Franchise With Low Royalty Fee

Buying a franchise involves different types of costs. Two major ones being the initial franchise fee and then there is the royalty fee that you pay to the franchisor every month. The franchise business is definitely easier than starting a business from scratch, but the affair is a costly one.

The beginners in this business often find it difficult to pay the royalty fee every month or every quarter. Many are reluctant to pay the amount as they don’t understand the purpose of it. Some franchisees ask if they can stop paying the royalty fee when they are not happy with the services of the franchisor.

A common question many franchisees ask is, can a franchise be owned without having to pay a royalty fee? To know the answer, one first needs to understand the concept of the royalty fee and why it exists in the franchise business model.

How is the royalty fee calculated?

Royal fee calculation

There are multiple ways in which a brand calculates the royalty fee to be paid by a franchisee. The most popular method is to calculate a percentage of the gross sales of the franchisee as a royalty fee. Usually, 5 to 9% of the total revenue is collected by the franchisor and the remaining 95 to 91% belong to the franchisee. Gross sale is basically the revenue generated from the sale of the products, services, or merchandise of the franchise without offering any sort of discount.

The percentage is fixed in most cases. It may increase or decrease depending on the brand policies and sales. There are some franchisors who charge a minimum royalty fee for each period, while some have fixed amounts based on the sale thresholds.

Purpose of the royalty fee 

Becoming a franchisee is similar to joining a club where you pay an initial payment is made to be a part of the club and then there are the periodic membership fees. In the franchise business model, you pay an initial franchise fee to be a part of the business and then there is the royalty fee you pay to maintain the membership with the franchisor. The royalty fee charged by the franchisor has reasons behind it.

  • Expense

The franchise fee that is initially paid to the franchisor is used for the purpose of training, advertising, and setting up of the franchisee’s business. Location approving and other costs are included within this initial fee. Hence, the franchisor doesn’t really gain anything from this amount. Therefore, the concept of royalty fee comes in. The franchisor makes his money from the royalty fee paid by each franchisee and this amount is ultimately used to support the franchisees and for building the business.

  • Support

The royalty fee is the amount a franchisee pays to secure the support from his franchisor. Franchisors provide support through field consultants, business strategies, marketing plans, and much more. All these are funded from the amount collected as a royalty fee. The cost of recruiting new franchisees, maintaining the headquarters and staff, all comes from the royalty fee.

The royalty fee is not a personal benefit of the franchisor. It is used for the betterment of the business and all the franchisees associated with the company. Hence, it is an important part of the franchise business model.

How to know if the royalty fee is reasonable?

The first step is to determine the profit that can be earned from the franchise after all the expenses and the royalty fee payment. Next, consider the average income and the initial investment in the business. Use this information to determine the expected rate of return (ROR). If the ROR looks reasonable then go ahead and purchase the franchise. Otherwise, refrain from buying. When royalty is charged as a percentage of the gross sales, some brands charge as low as 1% while some as high as 50%. With limitations on the fund, one would definitely want to go for the low rates or no royalty fee. How much you can afford is totally your decision.

Do franchises with no royalty fee exist?

From the previous sections, we know why a royalty fee is important to run a franchise. Almost all brands charge a royalty fee, the difference lies in the structure and how it is calculated in each brand. However, the good news is that the franchisors of the new generation are slowly moving to a no royalty fee business model. Recently many new brands have emerged which do not charge any royalty fee from their franchisees. So, to generate their ongoing income from the franchise, they require the franchisees to purchase products from designated suppliers at a mark-up. The total revenue of the franchisor comes from the sale of their products to the franchisee. This model attracts a large number of franchisees, especially the newbies in the business who find it a burden to pay it on a periodic basis.

Hence, we see that in some way or another the franchisor collects an ongoing fee from the franchisees. It is not possible to run a business without this amount. If the company goes out of business for not being able to support the operations, then the franchisees will also suffer a loss.

Low-cost franchises which beginners can afford

  • Fit Body Boot Camp

With health concerns growing in people, Fit Body Boot Camp has started franchises in 15 new locations, making a total of 417 franchises. With FBBC you can set up a low-cost franchise business at $35000. They have flat rate royalties. The investment is great even if you are not a trainer. There is no need to purchase expensive gym equipment also.

  • Just Between Friends

The business is focused on selling used toys, clothing, and other items of kids. The rates are 50% lower than the retail price. You can own a franchise of this brand at just $38000 and the royalty fee is minimal. 97 % of the franchisees are women in this company and most of them have other part-time jobs as well.

  • Help-u-Sell Real Estate

This was launched as an alternative to the traditional way of buying real estate where you have to pay a percentage to the broker. You will have to invest only $25000 to own a franchise of this brand.

  • Weed Man

This brand provides fertilizing pest, and weed control. Franchisees need to make a minimum of $43,700 of initial investment for training, marketing support, and automated operations.

  • Critter Control

The company works to keep the unwanted animals out of your houses, like raccoons, squirrels, bats, etc. To own a franchise of Critter Control an initial investment of $23400 needs to be made by the franchisee. Their royalty fee is also low and affordable.

  • National Property Inspections

The start-up cost of this company is $34900. The cost includes training, tools for marketing, and trade. The annual gross sales are great with this brand and the return is quite good after payment of royalty.

  • Soccer Shots

109 members of this company are new to the field of franchising. Each one is paying a minimum of $31742. The franchise is actively coaching the young soccer players.

  • Proforma

The franchise fee for this brand is as low as $4730. Even though the upfront fee is quite low, the gains are pretty good. One of the 7 owners has even made a sale of $1 million.

Advantages and Disadvantages of the different royalty fee Structure

The common method of using the percentage model where a percentage of the sales or turnover is charged as the royalty fee can be beneficial for the franchisors. Calculating the royalty fee on sales is much easier for the franchisor as compared to calculating profits. However, this structure can be disadvantageous to the franchisee because the cost of the enterprise might be quite high.

When the sales go up the royalty fee also increases, and this might cause the franchisees to become disgruntled. This can be handled by setting an upper limit on the royalty fee to be paid. Once the upper limit is reached the fee can remain fixed.

The fixed amount of royalty fees is best for the franchisees. If the sales increases there is no worry of having to pay higher royalty. However, this can be a pain when the sales go down. For the franchisor, it is beneficial as he has a constant source of income coming no matter what the sales are. But the franchisor may not find this approach useful when the sales of the franchise go up.

Conclusion

It is not possible to completely do away with the royalty fee when owning a franchise. With proper research, you can find many brands that work on the no royalty fee structure. But they have products with higher prices and the franchisors base their income on that. You can always opt for the low-cost franchises and analyze the royalty fee to see which suits you the best.