Types of Franchising Royalty Fees

Home » Types of Franchising Royalty Fees

The number of smokers has been on a steady decrease, thanks to the harmful effects of tobacco. More people are now opting for vaping rather than traditional smoking. The number of vapers grew from seven million in 2011 to over 35 million in 2016. Moreover, this number is expected to exceed 55 million by the year 2021. These numbers make starting a smoke shop the best option for investors nowadays.

With a smoke shop franchise, you can avoid most of the issues that contribute to the downfall of most startups. This franchise offers an established business concept, ready customers, and brand credibility. The continuing costs involved in the franchise are the royalty fees. A franchisor will use different structures for the establishment of his/her royalty fees. Here are some pointers to sharpen your understanding:

Fixed Gross Sales 

This is the most commonly used royalty fee structure. Here, you will report your total sales after making appropriate adjustments, including bad debts, taxes, and returns. The royalty fee will then be calculated based on a fixed percentage of your gross sales. Though simple to compute, a fixed total sales structure might not guarantee a proper balance between a franchisor’s and franchisee’s profits.

Variable Gross Sales 

There are two types of variable total sales, including decreasing and increasing rates. In a decreasing percentage structure, you will pay a lower percentage with an increase in your gross sales. This is meant to provide an additional reward for franchisees who work hard to boost their sales and encourage them to report their sales accurately. In an increasing percentage, you will pay a higher rate of your gross sales in royalty fees if you operate in a lucrative market. Though uncommon, this structure will compensate the franchisor for granting you a market with proven superior performance.

Minimum Fee Structure

e-cigarettes

This is used in cases where a franchisor imposes a financial performance on a franchise to guarantee that it will meet the brand’s set performance standards. The fee is based on the consumer price index and other bases. In most minimum fee structures, you will pay the higher amount of the fixed minimum cost and the gross sales percentage. The structure might hurt you if you have low sales and cannot afford the minimum fee.

Fixed Fee Structure

This features a fixed dollar amount monthly in royalty fees. The fee is also adjusted according to CPI and other financial and market bases. Though you will profit from increased unit sales under this structure, you should have plans in place to meet your fees in down seasons to guarantee that you do not suffer losses.

In the end, you cannot precisely determine the value of a franchise agreement by scrutinizing your agreement’s UFOC. This is the document that details your franchising finances. Instead of focusing on the numbers of the fee structures in your UFOC, focus on the global value of your business opportunity to form a clear picture of what to expect. Consult a professional if you feel unsure.

Scroll to Top