Understand First How to Determine The Franchise Fee and Royalty Fee

Starting or making a franchise, a franchise fee and royalty fee are needed. How does the technique assess the franchise fee and royalty fees? This article will submit information and understanding of these two fees.

Costs in a Franchise System

Franchise or what is known as a franchise business is a business where the second party (franchisee or franchisee) finds the right of the first party (franchisor or franchisor) to carry out a business with a name or brand and system and formalities that have been decided before with the term – certain times. In this franchise business, there are two types of fees, franchise fees, and royalty fees.

A franchisor can charge between two types of fees or both. The imposition of this fee will be determined at the start of the franchise agreement.

Franchise Fee

Franchisee fee is a fee that must be paid so that someone can operate a franchise from a company that is more and feel the benefits of the franchise.
This fee can be felt as the cost of purchasing franchise rights or the initial cost of a franchise.

The franchise rights can be used for specific periods and the period of these periods has been determined at the beginning of the agreement.

In other words, the franchise fee is paid for the use of rights and operational guidelines around the franchise period.

Royalty Fee

The royalty fee is the fee paid by the franchise for the franchise during the franchise period. This fee is a contribution fee for the results of the franchisee’s income. Payment of this royalty fee is often made before a specific date, and this date is determined according to discussions from both parties. (Read more: This is The Secret of Bubble Drink Franchise Business Success)

In general, this royalty fee is a percentage of the income received by the franchise (excluding taxes).

This percentage is determined in 2 types, there are flat, and some are progressive. In a flat percentage system, this means that royalty fees are paid in a fixed percentage and do not change regardless of income earned. Whereas in the progressive percentage system, the higher the profit obtained, the higher the percentage charged. In this second type, the limit will be determined at least sales turnover.

This royalty fee is not just an extra profit for the franchisor. This fee is used for many needs, for example:

  • Guidance or training to sustain franchise operations.
  • Implementation of franchise audits and business assessments.
  • Business research and development, for example, marketing strategies and brand management.

Determination of Franchise Fee and Royalty Fee

The fees charged by the franchisor must not be arbitrary. If the costs are too significant, then there will be no interested franchisees and businesses cannot develop. Conversely, if the fees charged are too low, the franchisor will lose money and lose the cost of developing the business. Therefore, some approaches are needed to assess the number of costs that should be.

# Market Oriented

As the name implies, this technique assesses the franchise fee and royalty through the market approach. Every industry has a different level of costs; for example, the cost of franchising the food industry will probably be cheaper compared to the retail product franchise. For this reason, the determination of franchise prices must be calculated using data issued by trusted institutions in similar industries.

By understanding the average franchise costs of similar industries, you will be easier to sell your franchise business.

This method is an easy technique, but it is quite risky. The reason is the franchise business that we offer certainly has a system and reputation that is the opposite of your competitors. Whether you are a new player or an old player in the franchise world, this system will often give up the level of costs that are too low or too high for your franchise.

# Customer Oriented

The second method of calculation focuses on the purchasing power of the customer. With customers’ purchasing power getting more significant, the franchise fee and royalty fee will be more expensive. Usually, these differences occur because of differences in regions, like the capital and suburbs or shopping center areas.

# Cost Oriented

This method of calculation is a very detailed and thorough method. With this technique, the franchise fee and royalty fee are calculated by including all costs required by the franchisor to develop the franchise system.

In enforcing a franchise business, the following costs are needed:

  • Survey the franchise place.
  • Design layouts (new stores or franchise outlets).
  • Initial inventory set.
  • Sourcing (search suppliers) for the initial stock.
  • Training (guidance and discussion) for the preparation of a business plan.
  • Search for human resources (employees).

Exceptions to the Franchise Fee and Royalty Fee

Franchise fees and royalty fees for a franchise recipient try to be the same as other franchises, with the criteria that the business situation is similar. This aims to avoid internal problems in the franchise system. However, this cost can change in some conditions.

Here are some examples of situations where franchise fees can change.

# Development of Multiple Units (Multi-Unit Development)

When the franchisee agrees to open some franchises at once, then often the franchisor will give up the franchise fee. For example franchise fees for 1 unit are IDR 50 million per unit to IDR 45 million per unit for five units at a time.

This discount is an incentive for franchisees because it opens more than 1 unit. It is not even a franchise fee, but franchise recipients who develop not a few units often pay a lower royalty fee.

# Transfer Fee (Transfer Fee)

Franchise fees will be reduced if the second party (franchisee) sells its franchise to a third party. Third parties do not need to fully pay franchise fees because the franchise is transferred from the second party to a third party.

# Founders Club Age

If a franchise business is still young, it can be big, and they will reduce franchise costs to make it look more attractive compared to the different franchise businesses that have developed. For example, franchise fees will be reduced to 5 first franchisees or 10 first units. Of course, this rule will be explained and explained to avoid misunderstandings between other franchisees.

Determine Franchise Costs Properly

In assessing franchise costs, franchisees must be able to consider the benefits for both parties.
The franchisor must ensure that the franchise system and franchisee find the desired financial benefits. Therefore, it is very urgent to assess the initial costs of the franchise accurately.

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