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Why does a franchisee have to pay an ongoing royalty fee?
Payment of a royalty fee is something that a franchisee often has difficulty coming to terms with, as on a day-to-day basis it is difficult to see the ongoing benefit when compared to payment of the initial fee, which includes, amongst other things, initial training. The royalty fee is an ongoing fee that is usually paid by a franchisee during the whole length of a franchise agreement in return for use of the franchisor’s trademark, systems and goodwill. Royalty payments received by the franchisor may also be used to offset expenses such as developing the franchise network, new products, services and technologies. Royalty fees are usually calculated as a percentage of gross sales of the franchisee’s business and are payable monthly, based on the previous months’ gross sales. Whilst a franchisee can ask for a breakdown of what it gets in exchange for payment of the royalty fee and how it is allocated, a franchisor is not usually required to justify where and how the royalty payments are allocated.
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