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What are Franchise Royalties?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 28 August 2016
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Franchise royalties are fees that franchises must pay to the parent company in order to retain their franchise status. These fees may be flat or based on a percentage of sales, depending on the franchise agreement established at the time that the franchise was started. When people apply to open a franchise, information about the royalties is disclosed in the franchise application so they understand their rights and obligations as franchise owners.

When a franchise is opened, a flat franchise fee is paid to license the name and associated branding of the parent company. In exchange for this fee, people have access to standardized materials made available to all franchises, ranging from packaging to uniforms, along with manuals, training programs, and other supporting materials. These are used to keep the experience at each franchise standardized, keeping customers comfortable by ensuring that all franchises will be familiar. This increases the value of the company's branding.

Franchise royalties may be submitted on a weekly, monthly, or quarterly business. The amount of the royalties varies. The parent company has obligations to the franchise including supplying materials and training, updating the franchise when policies and procedures change, and providing franchises with educational and promotional material to help them develop and grow. The franchise royalties are in turn reinvested in the parent company's operations.

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Franchises pay separately for the supplies and equipment they order. Things like promotional materials are often sent free of charge, but materials used in the operation of the franchise must be ordered from the parent company and paid for.

Parent companies usually require that statements be submitted with franchise royalties. The statements document income, showing how much money the franchise is making. In the case of franchise royalties based on percentages, the statements demonstrate that the franchise is making payments in the appropriate amounts. The statements are also used to confirm that the franchise is financially healthy and viable and to look for any signs of unusual activity that might indicate that there is a problem with the franchise.

Annual reports are also required from franchises. Parent companies usually require that standardized paperwork or electronic systems are used for making these filings. This ensures consistency across the network of franchises and allows companies to easily compile statistics and compare franchises. The annual report can also be audited if the parent company has reason to believe that a franchise is not reporting financial information accurately, either unintentionally or as a result of fraudulent behavior.

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