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Royalty Fees In Franchising: How They Work

by | Jan 13, 2023 | General | 0 comments

If you’re considering buying a franchise, it is important to understand royalty fees and how they work.  At a high level, royalty fees fund the support the franchisor provides you for the life of your agreement and are part of your ongoing monthly expenses of running your business. Royalty fees and how they are determined can vary widely from one industry to the next.

What Are Royalty Fees?

A royalty fee is an ongoing cost that a franchisee is required to pay the franchisor as part of their franchise agreement. Think of it like a health club membership: The franchise fee is a one-time amount you pay to join the franchise, while the royalties are the monthly membership dues.

Royalty fees in franchising pay for the right to use the franchisor’s proprietary trademarks, processes, business model, and ongoing support such as training, help desks and technology updates. Royalties also pay the cost of running the franchise organization and recruiting new franchisees.

Know, too, that franchisors will also require franchisees to pay ad royalty fees. This type of fee funds the franchisor’s marketing efforts, such as research and development, marketing strategy, advertising campaigns, and collateral the franchisees can use within their locations.

How Franchise Royalties Are Calculated

Royalty fees in franchising can be calculated in a number of ways. Most often, royalties are a fixed percentage of the franchise’s monthly gross sales. The rate can range between 4% and 12%, but for most franchises it falls between 5% and 9%. At Volofit, the royalty fee is 7%, calculated on the previous month’s gross sales. Some franchisors may also require a minimum royalty fee each month, while others charge a flat fee. Franchise organizations can also use a sliding scale to determine how much franchisees pay in royalties. The location’s sales will determine how much the franchisee will pay. Those who are top earners will pay more in royalties than those who are still working to break even.

Royalty Fee Guidelines

There are no guidelines franchises must follow to determine how much they require in royalties. Franchisors typically establish a royalty fee that is consistent with their industry, reflect the investment in the brand and the level of ongoing support. Most franchisors in the boutique fitness industry charge a 7% royalty fee.

Royalty fees must be disclosed by all franchisors in their Financial Disclosure Document, often referred to as the FDD. All franchisors by law have to make the FDD available to potential franchisees. As a potential franchisee, educate yourself on the fee structure of the company and consider what you receive in return for being part of the franchise system. Contemplate the quality of the franchise organization and what level of support the team at corporate provides their franchisees. It may be worth paying higher franchise royalties to a company that provides exemplary training and support, rather than lower royalties to a franchise that doesn’t offer much help.

Franchising With Volofit

Volofit is the only gym that transforms daily to keep your members’ minds engaged and their bodies challenged. Each day, Volofit offers completely unique functional HIIT group fitness classes designed to maximize your members’ potential and keep them coming back.

Volofit franchise startup costs, as provided in the 2022 FDD, range between $373,500 and $579,700. Franchise candidates should have at least $125,000 in liquid capital to start their own Volofit franchise. With our business model, franchisees have the ability to build multiple streams of revenue through our branded clothing, wearable tech, nutritional supplements, and promotional events – providing ample opportunity for investors to capitalize on their investment.

Learn how Volofit could be the fitness franchise that fits your ownership philosophy. Contact us today and one of our representatives will be in touch to see if we might be right for each other. It could be the first step in your new career!

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