Advantages and disadvantages of royalty for owner and buyer
Johannes Röll
08 / March / 20
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Advantages and disadvantages of royalty for owner and buyer
Regular payments that are paid to the owner of intellectual property or natural resources for their use in commerce are called royalty. Translated “royalty” is state or royal. Initially, such a payment was allocated to the state for the development of mineral resources. Currently, this term mainly refers to regular payments for a franchise (purchase of the right to use the brand name, its technologies and business plan).
As a rule, these contributions are paid every month until the 11th day. Payment for the use of copyright may occur for each subsequent publication without a fixed schedule.
Types of Royalty
The amount of royalties depends on the level of profit received by the franchise buyer. There are several options for calculating payments:
1. Percentage of all sales.
2. Percentage of margin (difference between price and cost).
3. A fixed amount.
4. Combined contributions.
The amount of royalties depends on the popularity of the brand and the size of the city in which the business is located. In small cities, as a rule, the size of payments is lower, since it is more difficult to earn income in them. On average, royalties are 5–13%. For example, at McDonald's, monthly contributions are 12.5%, and in the CFS - 11%. There are franchises that do not include royalties. They are usually suppliers of products for sale and benefit from the sale of their goods. There are times when the franchise owner hides royalties, laying them in the price of the supplied goods.
Advantages and disadvantages of royalties
For the franchise owner (franchisor), royalties are a very favorable condition of the contract, because he receives a constant passive income. As for the buyer of franchising (franchisees), then for him such contributions are fixed costs. However, the payer of contributions receives a guarantee of quality assistance of the franchisor in business, as the owner of the brand will be interested in the development of the project. An exception is a contract with a fixed amount of contributions. The franchisor offering these conditions will not care if the business of its buyer is developing or not. In addition, the franchisee will have to pay a set amount of royalties, even if he does not have any income.
There are times when a payer of royalties does not receive the expected return. For example, a brand may not have the declared value, or the franchisor may not provide the promised assistance. Thus, the franchisee is wasting his money. Before signing a contract, the buyer should carefully study all the conditions associated with royalties, and calculate the possible costs and planned profits.
In a franchise business, the phrase “lump-sum installment” is often heard. This is also payment for using the brand, but unlike royalties, it is paid once.
Johannes Röll
Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer
