Understanding Franchise Royalty Fees

In a previous article, we explored why initial franchise fees vary so greatly, and why some are worth paying and some not so much. The bottom line was this—a good franchisor will use the initial fees to help you launch your business, not to line their pockets. What about royalty fees? What IS a royalty fee? If you’re just starting to explore franchising and discussed royalty fees, royalties are ongoing payments, usually as a percentage of gross sales, that franchisees pay to franchisors. Franchisees pay these fees for…what? Mirroring the question about initial fees from the previous article, always ask a potential franchisor the following question:

What Support Do I Receive For Paying These Ongoing Royalty Fees?

Most franchise systems have royalty fees, but they can vary. If you are looking at a franchise or business concept with no ongoing royalties, or very low ongoing royalties, make sure you look very carefully at (1) what support you’re receiving and (2) how the franchisor is making money. Some franchisors try to make all their money on the front end with high initial fees, advertise no (or very low) ongoing royalties, and then provide no support to the franchise. Other franchisors will charge no (or very low) ongoing royalty fees, but require the franchisee to buy all of their products from the franchisor. This has the effect of being a royalty fee without the name—you may not be paying the franchisor a percentage of your sales, but they’re often getting a higher percentage by selling you the products you are selling. If this is the case, be sure the franchisor is providing some support beyond the products. Otherwise, you’re just a distributor for them.

As stated above, most franchisors will charge a royalty fee. On an ongoing basis, you’ll pay a percentage of your sales to the franchisor. What are you paying for? What are you getting in return for that ongoing payment? If you’re looking at a franchise concept, and this hasn’t been discussed, make sure you ask the question. In exchange for that royalty fee, a good franchisor should offer you support in at least the following three aspects of your business.

OPERATIONS

A franchisor should provide ongoing operational support for your business. This can come in many different forms. When you start an auto glass business with NOVUS, for example, NOVUS not only provides initial training and operational guidance, but also ongoing training and operational audits. NOVUS Regional Managers visit your market to help you maximize the efficiency of your business. NOVUS also flexes the power of its global network to help you keep costs down by providing you the best pricing on tools and materials. NOVUS provides a communication and ordering “Hub” for franchisees to take advantage of being one business owner amongst a network of business owners. NOVUS also employs a chemist and an engineering department to keep its franchisees at the forefront of industry technology. This kind of operational support should be consistent beyond the launch of your business, and is only part of the value franchisees receive for paying ongoing royalties.

SALES

In addition to helping you run the best business you can, a franchisor should also work to drive business to you. This occurs in different ways in different industries and is often intertwined with marketing. In the Auto Glass business, “sales” efforts are focused on business-to-business (B2B) sales and marketing efforts (while affecting B2B) are focused more on the general consumer. NOVUS is able to support franchisees on both a national and local level with B2B sales. In some cases, NOVUS signs national contracts with large fleets and fleet management companies, bringing work directly to NOVUS franchisees. In other cases, NOVUS’ sales team will help a franchisee win a contract for a local fleet opportunity. NOVUS’ long term relationships with insurance companies and the backing of a national brand are also key to obtaining insurance business on a local level. Sales materials targeting at B2B sales are continuously provided with the latest industry technology and information to position NOVUS franchisees as experts in the auto glass industry. Putting a B2B sales team to work for the franchisee is more value that a franchisor should provide in exchange for ongoing royalties.

MARKETING

One of the common reasons to purchase a franchise is to join a brand—to take advantage of brand presence and marketing. A franchisor uses ongoing royalty fees to help its franchisees reach consumers. For example, NOVUS provides its franchisees with ongoing search optimization services to make sure customers find the local NOVUS franchise when they search for auto glass service. NOVUS generates marketing materials for print, broadcast, and online placement so franchisees don’t have to bear that expense. NOVUS works to keep the brand at the forefront of consumer minds wherever a NOVUS franchisee is located. Marketing should not be the only support a franchisor provides, but it is key.

When you pay NOVUS’ 6% ongoing royalty, you are paying for an operations expert, a sales team, and a marketing department at a fraction of the cost of hiring these positions for your own independent business. NOVUS’ goal with this support is to drive business to local franchisees and make them as efficient as possible, increasing sales and profitably. This increases the volume of royalties, which allows NOVUS to invest more resources into supporting its franchisees. That is the symbiotic result of a true partnership between franchisee and franchisor. When exploring franchise concepts, be sure you understand the ongoing support provided to you in exchange for your ongoing royalties.

About NOVUS Glass

For over 47 years, NOVUS has remained the industry’s research & development leader in auto glass service. NOVUS has been awarded more U.S. Patents for windshield repair than any other company in the windshield repair industry. For more information on starting a NOVUS business please call 1-800-944-6811 or go to www.novusfranchising.com.