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Franchising Experts Stress The Importance Of Franchise Royalties

Written by Ken Gaebler
Published: 2/21/2012

Franchising consultants remind owners that royalties -- not franchise fees -- are the key to becoming highly profitable as a franchisor.

Profitability is a priority for every business owner. In franchising, franchisors expect their profits to come in the form of high margins and rapid growth. But according to franchising consultants, Francorp, many franchisors don't have a clear understanding about their true profit centers.

Franchising Royalties

In franchising, franchisors generate revenue through franchise fees and royalties. Franchise fees aren't intended to deliver profits, but to act as a way for the franchisor to immediately recapture the costs of marketing, training, support and other services that lay the groundwork for the franchisees' long-term success.

Although sales and vendor kickbacks can also deliver revenue to franchisors, royalties generate more than 50% of the profits in a typical franchise, primarily because royalties have high margins when compared to other profit centers across the franchise.

A franchisor with as many as 20 franchisees can service his entire chain with a single support person. But an average of 6% royalties and $500k in gross sales per franchise will deliver an annual yield of $30k per unit or an annual total of $600k in royalties.

By leveraging a combination of minimal staffing and the outsourcing of tasks like marketing, sales and accounting, franchisors have the ability to maximize the profits they derive from royalties and create a growth model in which profitability increases as the franchise expands.

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