Analyzing Royalties When Choosing Franchise Business Opportunities

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By Dzhingarov

We recently talked about small business franchises and we noticed that many individuals are interested in such opportunities. With this in mind, let us discuss this a little more and talk about royalties as they are important whenever analyzing small business franchising opportunities. It is one factor that many do not consider and it is really important that you do not make such a mistake. Here is why.

Franchise background concept

What Are Royalties?

You need to be really careful with the royalty fee structure. The royalty fees are basically charged when referring to ongoing support that is offered by a franchiser. This is also important as royalties are included for continuous use of intellectual property, including systems and branding. In most situations you will see that the royalties are calculated based on a percentage of the total turnover that is generated by the franchise and the amount set for franchise terms, while also making adjustments based on inflation.

When royalties are really high, the franchises end up pressured as they need to increase turnover. Such a measure will not bring in an increase in profitability. That is mainly as a turnover increase appears, so does the inventory amounts, wage costs and many other facts that are associated with the business input.

As the increased turnover does not always lead to an increase in profit, the prospective franchise needs to forecast potential business activity levels. It then has to evaluate net profit when analyzing every single activity level that is possible.

Whenever modeling such an activity, it is important to examine data sources that are useful. There are always Bureaus of Statistics in every country. They supply information that can tell you about budgeting processes. The information offered can be average gross profits, average business labor costs in the industry and average turnover.

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You need to be particularly careful when you model your first business operation year. That is especially true in the event that your small franchise opportunity is in the food industry. We say this as the industry always has high wastage in the very first operation year as business flow is not understood properly and different seasonal factors have an impact on outcome.

Keep in mind that even if you’ve previously did work that is similar or you managed a business that is similar, you need to add a safety margin as the business flow varies and operating conditions vary. Everything varies from one street to the next and from one region to the other.