franchising 101 / part 3: standard franchising fees – the royalty fee.

this is part 3 of our franchising 101 series. if you missed this go back to read part one: what is franchising? (the relationship, legal stuff + the most important clause in franchise law) + part 2: standard franchising fees – the initial fee let’s move on to the second of the 3 standard franchising fees you can expect to pay when you become part of a franchise system.

as promised we’re gonna get into the next…

standard franchising fee – the royalty fee

the royalty fee is an ongoing percentage of sales once your are open and operational. i’ve never really seen it be anything but 6%. i feel like the franchising forefathers got together and made this the standard going rate and no one really messes with it much.

this means 94% of the businesses revenues go to the franchise partner – and it should! the franchise partner pay for the space to be build out and runs to day to day of the operations. but that 6% that goes to the franchisor gets the franchise partner a ton of things no single location could ever invest in on their own. (trust me, i know, i used to own a couple bars and there are things we have now that i could only dream of having – either too expensive or frankly a waste of resources unless you have the volume to justify the costs)

let’s get into what the royalties cover:

x. ongoing operational systems, support and coaching
in most great systems you’ve got a dedicated head office that is there to help you every step of the way. in franchising the head offices incentive to have you make as much money is their biggest priority. the more you make, the more they (we / me) make. it’s in everyone best interested to have you be profitable – so most franchise systems have business coaches in place to look at your numbers with you, find cost savings, advise you on best practices, and help you run your location according to the proven system that made the concept successful in the first place. you get the benefit of years and years (in our case a decade and a half) of best practises on day one.

x. marketing, marketing, marketing
the strategy and execution of everything and anything marketing and guest acquisition and retention related. it’s having everything already done for you and continually being created at a rapid rate (or at least for us it is… our marketing department is fire). websites, post, stories and engagement across multiple social channels, design work, collateral, ads, event kits, promotions, innovations, contests, newsletters… the list goes on. to get what we give in house if we had to go to multiple outside agencies would be in the hundreds of thousands per year. all our fp’s get this on tap and save for hard printed good and anything they want to do additionally on a per bar basis – it’s all included in the royalty and brand fees.

x. innovation always on deck
one of most fav bits of business wisdom comes from former disney ceo bob iger, who say’s you’ve got to innovate or die. and i believe it. you have to keep getting better and better, you can’t rest on what used to make you famous. so all great franchise businesses know this too – it’s why there is always a new menu item at every franchised fast food joint. this research, design, costing, training programs, roll out and marketing kits are part and parcel of the ongoing fees you pay. it won’t cover things you’ll need. to buy to execute but the strategy , reacher and development sure will be. people pay big bucks for consulting companies to tell you what. todo – in this case, ti’s build into your head office most of the time.

x. economies of scale
that’s the fancy terminology for getting things super cheap because you buy a lot of it.
economies of scale are a massive perk of being part of a franchise system. consistency is key in franchising. guests expect things to be the same at one location to the next. you want a big mac to taste like a big mac regardless if you’re craving that sweet hangover cure in manitoba or in moscow. since you all do the same services and use the same products you require the same supplies. supplies get super cheap when you all purchase form the same supplier. a supplier has to work hard to gain each account they have – image the value of a franchisors account if they only have to work hard to gain one relationship but that relationship nets them hundreds of accounts. you get treated special as a franchisor and that specialness translates to hard core saving for franchisees.

x. proprietary products.
since a franchise system is buying in bulk that brand now gets to create. alot of it’s own shxt. we’d never have the muscle or buying power in my early days to formula our hard wax and dye it our pantone signature x.orange color – but now we do! we’d never afford to do the same with getting x.orange gloves made or having our towels dyed that same sweet x.orange shade – but now our bars are filled with ownable + widely recognizable branded items. and that brand power goes a long, long way, especially the bigger you get. as if those sbucks green mermaid coffee cups are recognizable from a mile while away… you only get brand recognition like that when you can get recognizable branded items like that!

x. being on your own, but never alone.
bottom line is that you’re not just a one off business when you franchise. you have the power, know-how and dedication of a head office that is there to help you every step of the way. from the little things like setting up new emails for new employees to those ‘i’m having trouble with this tricky employee’ to ‘i feel out of my depth here, please help’ type moments that every entrepreneur goes through. what’s more, everything you do inside your location has been tried, tested and made live through a team of people that are here for the same reasons you are.

not only do you have your hq – you also have dozens if not hundreds of other like minded, ambitious franchise partner colleagues to connect with. you’re part of something much bigger. and as someone that started all on my own – i can’t tell you that value is priceless (or at the very least super valuable.)

all in all, if you think about it – 6% is a small percentage that covers a ton. on a location that grosses half a million dollars, that franchisor makes $30k of that, and the fp pulls in there other $470k. there’s no way the value of all the operational support, marketing programs, infrastructure, innovations and everything else could be covered by $30k. so it’s a huge win for the individual franchise partners.

the way the franchisor makes a huge win is in volume. lots and lots of locations each paying $30-$60k a year (for a million dollar location) adds up quickly. that’s why franchise sales are so vital. you might not make anything on the initial fee, but once that location and all the others are up and running, it can really be a viable business.

this is also an added win for the franchise partner too. you want a head office flush with cash b/c if you’re in a great system that capital gets invested into better support systems to aid the franchise partner to better profitability. it’s a great little circle of win / win.

the incentive structures of both the franshior and the franchisee are totally aligned in the franchising business model.

for both parties the better the franchisee does at increasing their top line revenues + the more locations out there contributing their 6% royalties –> the better the franchisor will be because it has more fuel to invest in more expert people (who cost more) which helps in supporting the franchise partners with better operational support, innovations and marketing. plus the entire brand has more market dominance because instead of a couple locations out there in the world they have tons and a brand name that people naturally flock to (and will pay a higher price to be a part of – i think you can’t even get a new orangetheory fitness if you wanted to because they are all ‘sold out’ and if you want to buy an existing location the going rate is over $1million bucks now. that’s a great place for their franchise partners to be in. their exit strategy is set!)

here’s a little infographic we use in house to help explain our synergistic relationship to our new franchise partners:

next up… franchising 101 / part 4: the ad/brand fund fee.

x.kristen

if you’re interested in finding out more – join one of my webinars (link on the right) or…

x.kristen

note: all of this information was current as of today’s date, june 4th, 2021. it in no way may be valid or true beyond today’s date. i’m obviously not a lawyer and so none of this should be taken as legal advice. it’s just anecdotal info that’s i’ve gleaned from my years as a franchisor and was current info about my system at the time of writing this. stuff might be changed and so any current information about THE TEN SPOT® franchising system should be taken from our disclosure documents, franchise agreement, operational manuals and guides. amen!