What are royalties when you purchase a franchise?

What are royalties? This term comes from the English "royal", which translates as “Royal”. And royalty – the price that the royalty is levied on his subjects for the development of mineral resources or land ownership. Broad use of the term has acquired in the 16th century, when Industrialists engaged in developing coal mines with the permission of the state, was to pay him part of the profits.

Other values

Royalties can be used to indicate:

- duties;

- payment for the development of a wide range of mineral resources;

- rent;

- the license fee;

- to profit or share of the product reserved to the owner of the property, providing the right to possession of it to others.

What is royalty in the franchise?

Now often this term is used in this direction. Franchise – the most popular and profitable form of building a business. In fact, the entrepreneur acquires a franchise ready business. He gets the support of partners, trained staff and low prices. The franchise is purchased by making lump-sum payment (in installments or entire amount at once). What is royalty in this case? This is a fee to the franchisor for the brand. And, of course, for the use of technology and other services included in the license agreement. Royalty may be levied in a fixed amount or as a percentage of the profits. Everything is very individual and depends on the particular business.

Type of calculation

We found that such royalties, and now we are going to talk about the types of its calculation. There are only three:

- a Percentage of turnover. Today it is the most common type on the market. This percentage is paid to the franchisor for a certain period, and its size is prescribed in the contract.

is the Percentage margin. This type of remuneration is used when there are different levels of margins on a product or service. It is extremely vital for franchisors that have influence on the pricing policy of retail and wholesale trade.

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- Fixed. This is a standing order prescribed in the contract. Its size depends on the number of enterprises in business, number of clients, value of franchise services, etc. This kind of interest calculation is used in companies where it is difficult to determine the exact amount of income. Typically charged on a monthly basis.

Release Method

Now you know what a royalty. In conclusion, I will talk about the method of release from this payment. This method is used by the franchisor in order to determine the cost of the license and the patent. In a normal situation, the franchise owner gives its buyer the right to use your intellectual property for a royalty. In this case, the latter is a percentage of the proceeds received by the businessman as a result of the sale of goods or services. Method relief from royalty reads: for a certain period, the value of intellectual property is equivalent to the price of future royalty payments over the full lifetime of the license (patent). Calculation of royalties is based on the analysis of the specific market.