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Franchise Royalties Are Forever. But Are They Worth It?

A very successful franchisee of a real estate brokerage waspaying his monthly royalty fee one day when someone asked him, “Is it worthit?”

The franchisee had just written a five-figure number on hisroyalty fee check and he didn’t look happy.

“It’s painful to write these checks,” he said, “but the painlasts only for a moment. It’s painful because it’s so much money – hundreds ofthousands of dollars every year. Forever!But then I think about the brand that I represent. And I know that without thatbrand, and what it represents, I wouldn’t have the money in the bank to be ableto pay my huge royalty fee. So, yes, it’s worth it!”

While it’s rare to find a franchisee who will proclaim alove for paying royalty fees, it’s not unusual to find successful franchiseeswho say it’s worth paying royalty fees. Here’s why.

1.Royaltyfees help franchisors build and improve systems. At the core of everysuccessful franchise is a system, or a series of systems. Initially,franchisors spend tens of thousands, and possibly millions of dollars out oftheir own pockets to develop business systems that deliver products and/orservices to consumers. Franchisors train franchisees to operate these systems,which create successful businesses. Royalty fees reimburse franchisors fortheir initial costs, and also provide future money that’s necessary to continuedeveloping new systems, and perfecting existing systems. Every successfulfranchisee cherishes systems, and would never want their franchisor to stopproviding or improving systems.

2.Royaltyfees underwrite Research & Development. Business is rarely ever static.Businesses change constantly. Rules and regulations force businesses to change.Sometimes governments force businesses to change, as do economic anddemographic factors. So do competitors! Businesses protect themselves byforecasting change. What will you do if the government mandates a $15 or higherminimum wage? What happens to your revenues if the government increases taxes?Can you accommodate a change in consumer values and tastes? What if yourproduct falls out of favor? Small businesses have neither the time nor theresources to even think about these issues, let alone to develop defenses. That’swhy savvy franchisors use royalty fees to underwrite Research & Developmentdepartments that have one sole purpose: “Study the future and look out for thebest interests of our franchisees.”

3.Royaltyfees pay the training and support team. And everyone else who works at thecorporate office, including the CEO. Franchisees usually value theirfranchisor’s training and ongoing support. They also value other servicesprovided by the corporate office. Those services require people, and thosepeople expect to be paid. Few if any franchisors sell a sufficient number offranchises annually to pay their overhead. Without the monthly collection ofroyalty fees, there’s no corporate team.

4.Royaltyfees result in profit for the franchisor.  “I knew it,” said a suspicious franchiseprospect. “I knew they were going to make a profit off of me one way oranother.” But would it make sense to invest money in an unprofitablefranchisor? Franchising’s major benefits to franchisees include the provisionof an operating system, a developed name brand, training and support, and therecruitment of a like-minded network of franchisees that want to distributetheir products and services better than their competitors. How would an unprofitableentity ever support those benefits? Without those benefits, franchising doesn’texist.

For these and other reasons, successful franchisees agreethat it’s worth paying royalty fees. Forever!

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