The royalty, of course, is the ongoing percentage you receive of the franchisee’s gross sales—before expenses and before profits. It is the payment you get for the continued use of your name and business system. A study made with DePaul University some years back concluded that the average royalty for the 900 franchises we surveyed was 6 percent. Still, royalties do vary from franchise to franchise.

Three factors will weigh heavily upon the royalty you select. One is competition. If there are businesses similar to yours in the franchise marketplace, what are they charging? It can pay to find out. The second and most important factor is affordability. Remember your franchisee needs to make a manager’s salary plus a minimum of 15 percent return on invested capital. Will they be able to afford a 6 percent royalty? 10 percent? 4 percent? Typically, service businesses can afford to pay higher percentages because their expenses are lower. But so are their gross sales. If you start a business that sell products with narrow margins will have higher sales levels but will pay smaller percentages. If you have been in business for a number of years, you should have little trouble determining what percentage of sales a franchisee can afford to pay and still make a profit. At the same time, if you have had no experience in franchising you will be less qualified to judge what you will need in royalty income to provide services needed by your franchisees. The third factor is expenses. How often must you visit each franchise? Who will you send? What will be their salaries, car expenses, airfares, and hotel costs? You may want to consult professionals with franchise experience to assist with estimates.

One more word about royalties. An often heard joke in the franchise business is that royalties are collected weekly because it is inconvenient to collect them hourly. Actually, weekly collections benefit both franchisor and franchisee. Franchisor gets the money needed to operate on a timely basis. Franchisee is spared a big hit at the end of each month. Monthly collections, on the other hand, can pose a real problem for everyone. If a franchisee is delinquent in sending weekly royalties, the franchisor will know it quickly and be able to respond. Sometimes such delinquencies are a symptom of problems that can be corrected if detected early. if the franchisor is alerted quickly to this potential problem. If royalties are collected on a monthly basis, they are not due until the first week of the following month and it’s very easy to have a franchisee two months in arrears before a red flag goes up. To minimize collection problems even more, you should consider requiring payment of royalties by EFT (Electronic Fund Transfer) rather than the traditional check. This new process eliminates all sorts of transaction problems and expenses related to paper, and gives you immediate notice of non-payment difficulties.

Your Royalty fees will be based on the need to maintain sufficient corporate cash flow, to support general and administrative costs and franchise services, and to provide ongoing income for the continuing operation of the franchise. Royalty fees must be affordable to the franchisees.