Calculating the Franchise Fee and Royalty Fee Equal the Sales Price
Fast food restaurants operating a business model under the fast food chain name account for around 6-7 billion, but what’s fast food these days? Back in the 70s and early 80s, when all the new fast food chains first started operating, it wasn’t too hard to spot them. You could always see people in the streets, walking with their bags of burgers and fries, or with their hands stuffed into salads. But these days, even in the middle of the developed world, many people can’t afford to eat out very often. So what is fast food these days?
The word ‘fast food’ is now synonymous with quality, and quantity. Supermarkets have increased their available fresh food by offering more ‘ourmet’ fast food, and some of the larger chains are now preparing and selling ‘gourmet’ hot dogs, burritos and pizzas. Of course, there’s also the ever-popular takeaway and take away. A lot of people these days simply don’t have time to sit down, eat and enjoy a proper meal at a proper fast food restaurant. And that’s the beauty of the fast food restaurant business model. It allows the company to offer quality food at a fast rate – and this results in loyal customers who pay for their food, and who keep coming back for more.
Franchises – and indeed, the business model behind McDonald’s, and similar fast food giants – allow people who might never have considered buying a house or a franchise to buy a stake in a ready-made business. There are lots of things to be considered here. Franchisees have to understand the business, the demographics, and all the operational issues. They must know that franchising has a track record of success, and that the company is capable of doing well without them… unless they go crazy.
The second thing to consider is asset protection. The majority of small businesses do not have the cash, or solvency, to allow them to obtain bank loans; or credit lines. If they have no equity to speak of, or if their profits have depleted, they may be unable to secure the financing that they need. Many companies that franchise, or own and operate under their own name, make a big effort to ensure that their franchisees have sufficient funds and assets to continue and carry the business forward, even in case the need to raise capital should arise.
But just what are the prospects for small business ownership? Well, the answer depends upon who you ask. Some industry watchers think that in five or ten years, the small business niche is going to be completely taken over by franchisees. Others feel that as few as fifteen percent of franchisees will have sufficient purchasing power to survive, and that in ten years, around twenty percent of all new small businesses will be franchises.
Whatever your view, there is a good chance that you are not presently a franchisee. Are you an individual with experience in business ownership? If so, you might want to think seriously about the franchise fee required to get started in a business that has already existed for a period of time. Often, the franchise fee can be well worth ten to fifteen percent of your gross sales. This is based on the number of units you have constructed and the success level of those units. The higher your gross sales are, the better your chances of earning the franchise fee; and, the more success you have, the more you can build in that area.
Now, if you are thinking that you would like to be in business for yourself, you are probably wondering how much you would have to pay up front to start up and maintain a small business. The answer is not all that difficult to determine. Typically, you will pay anywhere from one percent to two percent of your gross sales in upfront fees to the company including any ongoing fees and any royalty fees which are paid on your products or services. In most cases, this will include a percentage of the gross sale as well.
This means that if you currently own a business that sells shoes, you will owe anywhere between one and two thousand dollars for the franchise fee and royalty fee equal to one percent of your gross sales in order to get started. Assuming that you start up a shoe business at the same retail price per pair that you were selling shoes for before you started, you will owe a minimum of one thousand dollars and you may owe more or less depending upon your experience level and the type of business you are starting. You may also have to pay additional ongoing fees, such as inventory, sales tax, and others depending upon the specific details of the agreement between you and the franchisor.