The first point to make about Royalties is that good Franchise systems should look at them not as a payment but rather as a remittance. It is the Franchisors share of the income derived from customers or clients. The Franchisee collects that fee along with all
other revenues from the customer.
Its an important concept because it emphasizes that the customer ultimately pays for everything, including the Franchisors royalty, the Franchisees overhead, all costs of sales, employees salaries, and the Franchisees profit. Therefore its all about the customer as it should be.
The Franchisee should want the Franchisor to earn a significant amount of royalties because thats really the oil that makes the engine run. Each Franchisee collects and remits a small portion of that oil to the Franchisor. All elements of the system can continue to improve as long as the royalty stream is strong.
The Franchisors royalty will be based on the fact that they have provided a system and strategy that has ultimately served the customer. The Franchisee delivers that system to that customer. The royalty represents the Franchisors share based on the various parts of the Franchise system, which has four elements.
The four elements of a Franchise are:
a) Brand b) Operating System c) Support System d) Franchisee
Brand the name associated with the services delivered in a memorable and satisfying experience to the customer
Operating System institutionalizes the excellent service delivered in a memorable experience so it can be done over and over again from Franchise to Franchise in a consistent manner
Support System helps the Franchisee get better and better at delivering the service in a memorable experience helps a Franchisee improve their performance
Franchisee the individual motivations or reasons for being in a good system, as well as the talents and experience delivered to the business.
The Operating and Support systems will generally provide access to advice at the level of professional consultants in the fields of marketing, management, advertising, execution of the delivery of the product or service, customer support, etc. The cost of these types of consultants on the open market will often far exceed the value of the royalty fees that are remitted by the Franchisee that participates in a system that delivers these items from a position of experience. In fact, its the exact experience the Franchisee requires as opposed to open market advice.
Now heres the test. If each of the four elements of a Franchise system is evaluated in terms of the percentage of contribution to the overall success of the business, then the royalty can be assessed in a proper light. Many people will say that each of the four elements contributes equally or 25%, to the overall success. That means that the Brand, Operating System, and Support System provide 75% of the success formula. Therefore, as long as the royalty is less than 75%, its a good decision to participate in the system. Thats a little silly, but it emphasizes the point.
Most royalties range from 2% to 10% depending on the type of system, so as long as the Franchisors systems contribute 10% or more to the success of the business, it makes sense to participate, and remit the collection of royalties to the system.
