What are royalties when buying a franchise?

What are royalties? This term comes from the English "royal", which translates as "royal". And royalty is the fee that royalty charged from its subordinates for the development of mineral resources or the right to own land. The term gained widespread use in the 16th century, when industrialists involved in the development of coal mines with the permission of the state had to pay him part of the profit.

Other values

Royalty can be used to indicate:

- duties;

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

- rent ;

- license fees;

- profits or shares of the product that the owner of the property has reserved for himself, giving the right to own it to other persons.

what is royalty

What are franchise royalties?

Now most often this term is used in the framework of this direction. Franchise is the most popular and profitable option for building a business. In fact, an entrepreneur acquires a finished business under a franchise. He receives support from partners, trained staff and low purchase prices. The franchise is bought by making a lump-sum payment (by installments or the whole amount at once). What are royalties in this case? This is a brand name franchisor fee. And, of course, for the use of technologies and other services provided by him, included in the license agreement. Royalties may be charged in the form of a certain amount or as a percentage of profit. Everything is very individual and depends on the specific business.

royalty contract

Types of calculation

We found out what royalties are, and now let's talk in detail about the types of its calculation. There are only three of them:

- 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 amount is prescribed in the contract.

- Percentage of margin. This type of remuneration is used when there are different levels of margins on a service or product. This is extremely urgent for franchisors who have an influence on the pricing policy of retail and wholesale.

- Fixed. This is a standing payment prescribed in the contract. Its size depends on the number of enterprises in the business, the number of customers, the cost of franchising services, etc. This type of calculation of remuneration is used in companies where it is difficult to determine the exact amount of income. It is usually charged monthly.

what are franchise royalties

Release method

Now you know what royalties are. 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 a normal situation, the franchise owner grants its buyer the right to use his intellectual property for royalties. In this case, the latter is a percentage of the revenue received by the businessman as a result of the sale of services or goods. The method of exemption from royalties states: over a certain period of time, the value of intellectual property is equal to the price of future royalties for the full life of the license (patent). The calculation of royalties is based on the analysis of a specific market.

Source: https://habr.com/ru/post/A11517/

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