Mechanical Franchise

The royalty, of course, is the ongoing percentage

you receive of the franchisee’s gross sales—before

expenses and before profits. It is the payment you get for

the continued use of your name and business system.

 

A study made with DePaul University

some years back concluded that the average royalty for

the 900 franchises we surveyed was 6 percent.

Royalty fees do vary between franchise opportunities.

 

Three factors will weigh heavily upon the royalty

you select. One is competitors in your market. If there are businesses

similar to yours in the franchise marketplace, what are they

charging? It can pay to find out. The second and most

important factor is affordability. Remember your

franchisee needs to make a manager’s salary plus a minimum

of 15 percent return on invested capital. Can they afford to pay 6 percent? 10 percent? 4 percent? Typically, service businesses can afford to pay higher percentages because their expenses are lower. But so are their gross

sales. Businesses selling products with narrow margins

will have higher sales levels but will pay smaller percentages.

If you have been in business for a number of

years, you should have little trouble determining what

percentage of sales a franchisee can afford to pay and

still make a profit. At the same time, if you have had no

experience in franchising you will be less qualified to

judge what you will need in royalty income to provide

services needed by your franchisees. The third factor

is expenses. How often must you visit each franchise?

Who will you send? What will be their salaries, car

expenses, airfares, and hotel costs? You may want to

consult professionals with franchise experience to assist

with estimates.

 

One more word about royalties. An often heard joke in the franchise business is that royalties are collected weekly because it is inconvenient

to collect them hourly. Actually, weekly collections

benefit both franchisor and franchisee. Franchisor gets

the money needed to operate on a timely basis. Franchisee

is spared a big hit at the end of each month.

Monthly collections, on the other hand, can pose a real

problem for everyone. If a franchisee is delinquent in

sending weekly royalties, the franchisor will know it

quickly and be able to respond. Sometimes such delinquencies

are a symptom of problems that can be corrected if detected early.

if the franchisor is alerted quickly to this potential problem. If royalties

are collected on a monthly basis, they are not due

until the first week of the following month and it’s very

easy to have a franchisee two months in arrears before

a red flag goes up. Royalty collection problems can be greatly minimized by by requiring payment via electronic funds transfer. This new process eliminates all

sorts of transaction problems and expenses related to paper, and gives you immediate notice of non-payment

difficulties.

Your Royalty fees will be based on the need to maintain

sufficient corporate cash flow, to support general and administrative costs and franchise services, and to provide ongoing income for the continuing operation of the franchise. They must also be affordable for franchisees.