What is a royalty when buying a franchise?
What is royalty? This term came from the English "royal", which translates as "royal". A royalty - a fee that the royal government collected from their filed for the development of mineral resources or the right to own land. The term was widely used in the 16th century, when industrialists who were engaged in the development of coal mines with state permission had to pay a portion of the profits to it.
Royalties can be used to refer to:
- fees for the development of a wide range of subsoil resources;
- fees for the license;
- the profit or share of the product that the owner of the property has reserved for himself, granting the right to own it to others.
What is a franchise royalty?
Now more often this term is used inframework of this direction. Franchise is the most popular and profitable option for building a business. In fact, an entrepreneur acquires a ready-made business in a franchise. He receives support from partners, trained staff and low purchase prices. The franchise is bought by making a lump-sum contribution (in installments or at once the whole amount). What is royalty in this case? This is a fee for the franchisor for the brand. And, of course, for the use of technology and other services provided to them, included in the license agreement. In this case, royalties may be levied in the form of a certain amount or as a percentage of profits. Everything is very individual and depends on the specific business.
Types of calculation
We found out what royalty is, and now we'll talk in detail about the types of its calculation. There are only three of them:
- Percentage of turnover. Today it is the most widespread type in the market. This percentage is paid to the franchisor for a certain period, and its size is prescribed in the contract.
- Percentage from margin. This type of reward is used when there are different levels of mark-up for a service or product. This is extremely urgent for franchisors that have an impact on the price policy of retail and wholesale trade.
- Fixed. This is a permanent payment, prescribed in the contract. Its size depends on the number of businesses in the business, the number of customers, the cost of franchising services, etc. This type of remuneration calculation is used in companies where it is difficult to determine the exact amount of income. Usually, it is charged monthly.
Method of liberation
Now you know what royalty is. In conclusion, let's talk about the method of exemption from this payment. This method is used by the franchisor in order to determine the cost of a license and a patent. In the usual situation, the owner of the franchise grants its buyer the right to use the object of its intellectual property for royalties. In this case, the latter is the percentage of revenue received by a businessman due to the sale of services or goods. The method of exemption from royalty states: within a certain period, the value of intellectual property is equal to the price of future royalty payments for the full life of the license (patent). Calculation of the value of royalty is based on the analysis of a particular market.