Franchise Royalties Are Forever. But Are They Worth It?

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

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

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

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

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

2.      Royalty fees 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 and demographic factors. So do competitors! Businesses protect themselves by forecasting change. What will you do if the government mandates a $15 or higher minimum wage? What happens to your revenues if the government increases taxes? Can you accommodate a change in consumer values and tastes? What if your product falls out of favor? Small businesses have neither the time nor the resources to even think about these issues, let alone to develop defenses. That’s why savvy franchisors use royalty fees to underwrite Research & Development departments that have one sole purpose: “Study the future and look out for the best interests of our franchisees.”

3.     Royalty fees pay the training and support team. And everyone else who works at the corporate office, including the CEO. Franchisees usually value their franchisor’s training and ongoing support. They also value other services provided by the corporate office. Those services require people, and those people expect to be paid. Few if any franchisors sell a sufficient number of franchises annually to pay their overhead. Without the monthly collection of royalty fees, there’s no corporate team.

4.      Royalty fees result in profit for the franchisor.  “I knew it,” said a suspicious franchise prospect. “I knew they were going to make a profit off of me one way or another.” But would it make sense to invest money in an unprofitable franchisor? Franchising’s major benefits to franchisees include the provision of an operating system, a developed name brand, training and support, and the recruitment of a like-minded network of franchisees that want to distribute their products and services better than their competitors. How would an unprofitable entity ever support those benefits? Without those benefits, franchising doesn’t exist.

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