Royalties, Advertising Fees Most Predominant Charges by Franchises
Contact: Terry Hill or Amy Bannon 202-628-8000 WASHINGTON, D.C. Oct. 4 --- Franchising offers entrepreneurs a deal: in return for using a franchise brand trademark, operational guidance, marketing support and other franchise-company-provided services, franchisees must pay up-front and ongoing fees. According to the third in a series of International Franchise Association Educational Foundation - FRANdata studies about the sector, royalties and advertising fees are the most predominant ongoing charges.
While there are exceptions (franchising utilizes many different business models, agreement terms, and support services in different industries), generally ongoing fees are defined in terms of a percentage of sales or receipts. However, they also can be fixed dollar amounts, based on an estimated number of transactions, or even determined by the number of vehicles used in a particular franchise program. Many franchise systems have minimum fee requirements but some have no recurring fees at all.
Most franchises charge franchisees a royalty based on a percentage of gross sales. The average is 6.7 percent, however, the percentage varies by type of industry, from 4.6 percent for restaurant and hotel franchises to 12.5 percent for personnel services franchises. Some franchise systems use a percentage range that can allow for unique business units and others use a more complex formula, such as a sliding percentage scale that adjusts downward as unit revenues rise or is set lower for new units.
Franchise systems employ different types of advertising programs based on their industry and business model. The three most common are national/general, local, and cooperative/regional. National advertising is used mainly for brand and large-scale advertising campaigns; local advertising is usually determined by the franchisee and specifically advertises the unit; cooperative/regional programs typically promote within a geographically-designated market area. Smaller systems may only have one general advertising program.
Advertising fee percentages reflect the contract amounts that a franchisee can be assessed. However, in practice, some franchise companies charge lower fees than those stipulated in their agreements. In some cases, local fees can be credited towards regional/cooperative requirements. Further, cooperative/regional advertising may not be fully assessed until a franchise company reaches a larger size in its market.
Total fees, a combination of royalties and advertising fees, range from a low of 6.3 percent to more than double at the high end of 14 percent. Differences in industries, services provided, and brand value are among the reasons why total fees vary widely from franchise system to franchise system.
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Ed. Note: For more information about the IFA-FRANdata study series, including charts and tables, visit www.franchise.org to see The Profile of Franchise: 2006.