Franchise Pick

#6 of 10 Reasons NOT to Buy a Franchise: Royalty Payments

by sean on February 14th, 2007

Nolo.com features an article titled:  Ten Good Reasons Not to Buy a Franchise. 

According to the author, there are ten compelling reasons NOT to buy a franchise.   We’re looking at them one-by-one.

6.  Royalty payments. Franchisees are generally required to make continuing royalty payments to the franchisor each month based on a percentage of his or her franchise’s sales, eating into the franchisee’s net profits.

This is true.  In most franchise systems, you will pay the franchisor 4% - 6% of your gross sales (usually weekly, not monthly).  Often there are required advertising fund contributions;  in some cases, in chains like Subway, this can add up to as much as 12% of your gross sales.  Note we’re talking gross sales… whether you’re profitable or not, the franchisor is entitled to the royalty payment.

Is this a reason NOT to buy a franchise?  No.  It’s a reason to make sure that the benefit that you are going to gain by being part of a particular franchise far outweighs the royalty payment you’re going to be making.  It’s important that you remember that franchising isn’t magic:  it’s simply a fee for services and intellectual property rights.  Being part of a particular franchise should add to - not eat into - your net profit.  If there’s not a clear indication that it won’t, look elsewhere.

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POSTED IN: x Franchise 101, x Insider Tips, xBuyer Beware