Is a royalty fee that’s charged as a percentage of turnover better than a fixed fee?

Louise Harris writes:

The use of fixed fee versus percentage of turnover royalties (or management service fees) is slightly controversial in franchising, but there are arguments for both.

A franchisor will primarily make their money from the royalties a franchisee pays.

Paying a fixed fee gives a known payment amount each month, irrespective of the amount of business a franchisee has. In some cases, this acts as a motivator for a franchisee, knowing that over a certain income each month 100 per cent of the income stays in the business. Since the franchisor will receive the same amount of money each month, the question is what motivation does the franchisor have to innovate and help the franchisee drive more business? And this is a question to ask before buying a franchise.

Working on a percentage means the franchisor also has ‘skin in the game’. There is motivation for a franchisor to innovate ways to drive business for the franchisee and increase local revenue, as they in turn earn more.

It does mean that sometimes paying the franchisor at the end of the month can feel tough, as it’s easy to forget they’ve helped you get to that level in the first place.

A cap or percentage fee reduction on achieving targets may be pertinent when a franchisee reaches higher income levels

Louise Harris is an experienced franchisor, having built and sold an award winning franchise. She’s currently franchise operations manager at Mathnasium UK.