franchise fee

A franchise fee is a fee or charge that one party, known as the franchisee, pays another party, known as the franchisor, for the right to enter in a franchise agreement. Generally by paying the franchise fee a franchisee receives the rights to sell goods or services, under the franchisor's trademarks, as well as access to the franchisor's business processes. Often, the franchisee fee includes some assistance from the franchisor in opening the franchised business.

Scope

By joining a franchise, an investor or franchisee is able to run a business under the umbrella of the franchise.

The franchisee must pay a franchise fee, which may become costly. In the United States, it may amount to thousands of dollars.USA Federal Trade Commission
/ref> In return, the franchisee may enjoy the use of the franchisor's system and name for a limited time, as well as assistance. Such help includes location assistance for the outlet. The franchisor may provide initial training and an operating manual. Then the franchisor may also advise the franchisee on management, marketing, or personnel.

Through paying the franchise fee and joining an established franchise system, the franchisee may be entitled to significant cost savings from suppliers. However, there are major franchise systems like Quiznos who received rebates from suppliers and did not pass along the cost savings to the franchisee. It is required by law to disclosure rebates and related payments that the franchisor might receive from suppliers in the franchise disclosure document.

Payment Methods for the Franchise

There are two ways to pay for a franchise:

Lumpsum Payment

When buying a franchise, a lumpsum payment has to be made. A lumpsum payment is a one-time fee for the right to use a product, a brand, a business model. In addition, there may also be a monthly payment in the form of a percentage of turnover.

EMI Payment

Some Franchisors also allow part payment or EMI mode of payment to the Franchisee. In such scenario, few brands or franchisors charge some interest aswell from the franchisee for EMI or Part Payment. These payments are divided into multiple installments as finalized between both the parties i.e. franchisee & franchisor.

Royalty

Royalty is a monthly payment, a kind of rent for the opportunity to use a promoted brand. The royalty is usually 5-10% of the turnover. In the international franchise market, royalties are more common. In this case, the partners' revenue is sufficiently "transparent" and the probability of underreporting is close to zero. Fixed royalties are used less frequently, as it is believed that this option indicates that, on the one hand, the franchisor is not interested in the development of the partner; on the other hand, fixed royalties are quite onerous for franchisees, who are just starting to earn in the first months of work.

''What is the normal royalty rate''

According to the International Franchise Association, 6.5% is the average royalty, which varies depending on the type of business. In the restaurant and hotel business, royalties can be much lower than in other areas, averaging 4.5%. At the same time, some fast-food brands set royalty levels above 10%. In retail, IFA data shows an average royalty of 6%, in real estate, 7.5%, and in education, 8.5%.

See also

*Franchising
*Franchise fraud

References

External links

Federal Trade Commission resources
*{{cite web, url=http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1077061265&type=RESOURCES, title=Turn your business into a franchise: Franchise fees and royalties, work=Business Link, publisher=UK Government, accessdate=17 September 2010, archive-url=https://web.archive.org/web/20110610202427/http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1077061265&type=RESOURCES, archive-date=10 June 2011, url-status=dead

Franchising
Strategic alliances