Buying a franchise involves many financial considerations, and royalty fees are among the most important. They're also easy to compare, at least on paper. If one franchise charges 6% of gross revenue and another charges 8%, it's understandable that a prospective owner might favor the lower rate.
But Peter Eberly, vice president of brand development at Strategic Franchising Systems (SFS), says that approach misses an important part of the equation. A royalty is not simply another expense attached to franchise ownership. It helps fund the infrastructure, resources and ongoing support that distinguish buying a franchise from starting an independent business.
"It's important to understand what this is and why it is," Eberly said. "Royalty fees fund the ongoing coaching, the training that you get, the technology, the software, the vendor relationships that are built, the brand in and of itself. They aren't a tax for owning this business. They are the payment to get all the advantages and tools of a successful business model."
The initial franchise fee and ongoing royalty serve different purposes. While the franchise fee generally covers the right to enter the system and the resources needed to get started, royalties support the relationship between the franchisee and franchisor throughout the life of the business.
That can include continued coaching, operational support, training, technology platforms, software, vendor relationships and the systems that the franchisor continues to develop and refine.
"If I was evaluating a franchise, the right question to ask is: What am I getting for these royalty payments?" Eberly said. “Comparing a royalty percentage from franchise A to franchise B should be about what [you get in] training, support and brand equity. You aren't just comparing royalty percentages.”
Two franchises charging the same royalty could provide very different levels of support. Likewise, a franchise with a slightly higher royalty could include resources that an owner would otherwise need to source and pay for independently. The royalty percentage only tells a candidate what they will pay. It does not, on its own, explain the value behind that payment.
Prospective franchisees should also understand that royalties are generally separate from required contributions to a brand or marketing fund.
"The marketing brand funds go to national marketing systems or campaigns or lead generation,"
Eberly said. “This is all spelled out very specifically in FDDs, and it's important to understand the difference between the royalties and brand funds.”
That information can be found in Item 6 of the Franchise Disclosure Document (FDD), which outlines recurring and other fees franchisees may be required to pay.
The differences are apparent even among brands owned by the same franchisor. Within Strategic Franchising Systems, Fresh Coat Painters charges 6% on the first $1 million in annual gross revenue, 5% between $1 million and $2 million and 4% above $2 million. Meanwhile, TruBlue Home Service Ally charges 6% and Pet Wants charges 7%.
Each of the three brands also has a 2% national branding contribution, separate from the royalty, with applicable minimums depending on the concept. Those percentages matter, but Eberly argues they should be the start of a candidate's investigation rather than the end.
The FDD gives prospective franchisees an opportunity to understand both sides of the royalty equation.
Item 6 tells candidates what fees they will owe. Item 11, meanwhile, details the franchisor's assistance, advertising programs, computer systems and training. Reading those sections together can give a candidate a clearer picture of what they're paying and what the franchisor is responsible for providing.
A candidate can then dig deeper during conversations with the franchise development team. What does initial training look like? What happens after opening? How often does the franchisee interact with the support team? Which technology platforms are included or required? Are vendor relationships already established? What resources exist for hiring, operations, sales or scaling the business?
Those questions can reveal much more about the economics of a franchise relationship than comparing percentages in isolation. But candidates do not have to rely exclusively on what the franchisor tells them.
One of the most useful parts of franchise due diligence is validation, when prospective owners speak directly with people already operating the business.
"For our concepts, prospective franchisees will get an opportunity to talk to current franchisees during the validation phase," Eberly said. “If they are evaluating this, a really good question to ask an existing franchisee is: 'How do you feel about what you are paying for royalties? Are you getting a good value or what you expected?' That's a great question to ask.”
Ultimately, royalty fees are part of the cost of operating within a franchise system. But evaluating them requires more than looking for the smallest percentage. The real question is what sits behind that number.
To find out more information on costs to buy this franchise, please visit https://1851franchise.com/strategicfranchising.
Strategic Franchising
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Peter Eberly, vice president of brand development at Strategic Franchising Systems explains what franchise royalties pay for and which questions candidates should ask before signing an agreement.
Buying a franchise involves many financial considerations, and royalty fees are among the most important. They're also easy to compare, at least on paper. If one franchise charges 6% of gross revenue and another charges 8%, it's understandable that a prospective owner might favor the lower rate.
But Peter Eberly, vice president of brand development at Strategic Franchising Systems (SFS), says that approach misses an important part of the equation. A royalty is not simply another expense attached to franchise ownership. It helps fund the infrastructure, resources and ongoing support that distinguish buying a franchise from starting an independent business.
"It's important to understand what this is and why it is," Eberly said. "Royalty fees fund the ongoing coaching, the training that you get, the technology, the software, the vendor relationships that are built, the brand in and of itself. They aren't a tax for owning this business. They are the payment to get all the advantages and tools of a successful business model."
The initial franchise fee and ongoing royalty serve different purposes. While the franchise fee generally covers the right to enter the system and the resources needed to get started, royalties support the relationship between the franchisee and franchisor throughout the life of the business.
That can include continued coaching, operational support, training, technology platforms, software, vendor relationships and the systems that the franchisor continues to develop and refine.
"If I was evaluating a franchise, the right question to ask is: What am I getting for these royalty payments?" Eberly said. “Comparing a royalty percentage from franchise A to franchise B should be about what [you get in] training, support and brand equity. You aren't just comparing royalty percentages.”
Two franchises charging the same royalty could provide very different levels of support. Likewise, a franchise with a slightly higher royalty could include resources that an owner would otherwise need to source and pay for independently. The royalty percentage only tells a candidate what they will pay. It does not, on its own, explain the value behind that payment.
Prospective franchisees should also understand that royalties are generally separate from required contributions to a brand or marketing fund.
"The marketing brand funds go to national marketing systems or campaigns or lead generation,"
Eberly said. “This is all spelled out very specifically in FDDs, and it's important to understand the difference between the royalties and brand funds.”
That information can be found in Item 6 of the Franchise Disclosure Document (FDD), which outlines recurring and other fees franchisees may be required to pay.
The differences are apparent even among brands owned by the same franchisor. Within Strategic Franchising Systems, Fresh Coat Painters charges 6% on the first $1 million in annual gross revenue, 5% between $1 million and $2 million and 4% above $2 million. Meanwhile, TruBlue Home Service Ally charges 6% and Pet Wants charges 7%.
Each of the three brands also has a 2% national branding contribution, separate from the royalty, with applicable minimums depending on the concept. Those percentages matter, but Eberly argues they should be the start of a candidate's investigation rather than the end.
The FDD gives prospective franchisees an opportunity to understand both sides of the royalty equation.
Item 6 tells candidates what fees they will owe. Item 11, meanwhile, details the franchisor's assistance, advertising programs, computer systems and training. Reading those sections together can give a candidate a clearer picture of what they're paying and what the franchisor is responsible for providing.
A candidate can then dig deeper during conversations with the franchise development team. What does initial training look like? What happens after opening? How often does the franchisee interact with the support team? Which technology platforms are included or required? Are vendor relationships already established? What resources exist for hiring, operations, sales or scaling the business?
Those questions can reveal much more about the economics of a franchise relationship than comparing percentages in isolation. But candidates do not have to rely exclusively on what the franchisor tells them.
One of the most useful parts of franchise due diligence is validation, when prospective owners speak directly with people already operating the business.
"For our concepts, prospective franchisees will get an opportunity to talk to current franchisees during the validation phase," Eberly said. “If they are evaluating this, a really good question to ask an existing franchisee is: 'How do you feel about what you are paying for royalties? Are you getting a good value or what you expected?' That's a great question to ask.”
Ultimately, royalty fees are part of the cost of operating within a franchise system. But evaluating them requires more than looking for the smallest percentage. The real question is what sits behind that number.
To find out more information on costs to buy this franchise, please visit https://1851franchise.com/strategicfranchising.
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