This fee is normally identified in business terms as a 'Royalty'. This is a regular payment made by the franchisee to the franchisor therefore creates a legal relationship between the two parties. To grow and be successful and continue in business for years to come, the relationship between the franchisor and franchisee needs to be good and strong. There should be a franchising document drafted by a lawyer, read, and understood by both the parties who enter into the agreement. Typical details that should be in the document are:

• Terms of the type of business.
• Trade mark policies.
• Payments by franchisee to franchisor.
• Termination procedures and policies.
• Rights and obligations/procedures and restrictions of both the parties.
• Duration of the franchise.
• Technical support rendered.
• Transfer details of the franchise to another party.
• Territory and geographical location.
• Costs.

Other details, specific to the business, could also be added by the parties. The document should comply with the legal requirements of the national company law.

Both the franchisor and the franchisee have obligations and rights.

The rights of a franchisee.

• The franchisee needs to understand the type of business and the background of the market.
• A franchisee has the right for technical support, training, development assistance.
• The franchisee needs to receive Market information, advertising support and field support from the franchisor.
• Rights when a franchise relationship is ended.
• A potential franchisee has the right to see records such as balance sheets, and income statements of other franchisees to gain knowledge about the business as well as the franchisor.

The information a potential franchisee would like see includes:

• Increase in Current assets.
• Positive cash balance in a bank account.
• Positive stock level.
• Increasing franchisees with a less turnover.
• More demand for products & services of the franchisor.

This information will be important to a franchisee in order to decide whether to enter into a contract. Therefore it is necessary for the franchisor to maintain a good record of financial statements.

Rights of a franchisor.

• Right to receive a royalty for the services given.
• Right to inspect financial information of franchisees.
• Right to terminate contract if fraud is being done.

The success of a franchising company is measured by a fee received by the franchisor on a weekly or monthly basis. The franchisor has the right to receive this fee and it's normally known as a Royalty. A royalty is received separately of the initial franchise fee. This is the main source of income of the franchisor and expands the profitability of the company. This royalty fee is normally based on a percentage of profits.

The reason franchisees pay a royalty fee to the franchisor is for the continuous support, for the company name and equipment used. This means that continuous support will be given to the franchisee by the franchisor in order to maintain the good reputation of the mother organization. Regular visits are made by the franchisor to consult research and develop the franchise company.

A franchisor gets a major part of his revenue from his franchisees. This is normally a percentage of the gross sales of the franchisee. There two types o royalties.

• Fixed Royalty.
• Variable royalty.

A fixed royalty is charged up to an optimal sales level has been achieved. Once the optimal sales level has been achieved a variable royalty will be charged. Thereby the revenue of a franchisor will increase when the franchisee exceeds a certain fixed level of sales. It is encouraging to the franchisee as well as the franchisor because when sales levels increase the revenue level increases.

The maintenance of a good relationship, providing necessary training and support, and regular visits for updating technological development are all necessary in order to keep the franchisee happy about paying their royalty payments.


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