Professional Documents
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how the franchisor makes its money, which it uses to support its franchisees and
further build the business.
Generally, all the support provided by the franchisor through its field consultants,
marketing plans, business strategies, etc., are funded through the Royalty
Payments provided by the franchisees. Additionally, all the administrative costs of
running the franchisors headquarters and staff are funded from the royalty
payments.
Lastly, the franchisors efforts to further expand and develop the brand through
recruiting and bringing in new franchisees to the system is funded by royalties.
There are a number of ways that franchisors establish what their ongoing royalty
fee will be. The most common is a percentage of the Gross Sales that the
franchisee earns. Typically this ranges from between five and nine percent. So,
essentially, the franchisee is taking in 91-95% of their gross sales with the rest
going to the franchisor. Gross Sales is the amount of revenues from the sale of
services, goods, and any other products or merchandise by the franchisee, and is
not reduced by any discounts given to employees or family members, taxes, or
returns/credits/allowances/adjustments.
In most franchise systems this percentage is fixed, but it can be also be an
increasing or decreasing percentage depending on the level of sales. Some
franchisors require a minimum royalty payment for each period, whether by a
percentage or by a set dollar amount. There are also franchisors that determine
the royalty amount as a set dollar amount based on different sales thresholds.
Further, some franchisors dont require any ongoing royalty payment at all.
3. Are all trademarks and names legally protected?
Ans. The most important thing about buying and operating a franchise is your
access to and right to sell goods (or services) that the public already knows,
trusts, and buys. Unlike businesses that are started from scratch, a franchise gives
you instant name and brand recognition.
Primarily, you get that name and brand recognition by being allowed to use the
franchisor's trademarks, and it's probably the most crucial aspect of almost every
franchise. The franchisor's trademarks are at the heart of the franchise deal: it's
really what you're buying.
Trademarks are words, names, or symbols that both identify goods made or sold
and distinguish them from goods made or sold by others. They're at the core of
name and brand recognition.
Like everything else associated with the business, your rights and obligations with
respect to the franchisor's marks most likely are governed by the franchise
agreement you and the franchisor signed. The terms of franchise agreements, of
course, vary by the type of franchise you're buying, but many franchise
agreements will have trademark provisions in which:
You acknowledge that the franchisor owns the marks and that you have only
the right or "license" to use them
Your right to use the marks lasts only as long as the franchise agreement is in
force, so if the agreement expires and you don't renew it, you can't use the
marks anymore
You agree not to add to, alter or change any of the marks when using them in
the operation of your shop
You're barred from using the marks on anything that is not supplied by the
franchisor or an authorized supplier. For example, you would not be free to
choose any supplier of company shirts featuring the franchisor's logo
You can only use the marks on goods or products that are covered by the
franchise agreement. For example, if your franchise is one for selling
automotive parts, it would probably be a violation of your franchise agreement
if you used the franchisor's logo on hamburger wrappers and sold the
hamburgers in your parts store
You agree to safeguard the franchisor's sensitive information, such as how a
product made or a recipe, by not sharing such information with other persons
outside the franchise "family" and taking measures to ensure that your
employees likewise do not share or divulge the information. Your agreement
not to use or share the information usually remains in force after the franchise
agreement ends. So, after your fast food restaurant franchise ends, you can
continue to make and sell hamburgers, but you can't use any recipes owned by
the franchisor
You're required to report to the franchisor any unauthorized use of the
franchisor's marks that you discover or become aware of
Other than the franchise agreement's provisions for royalty fees, the trademark
provisions are probably the most important aspect of the agreement.
franchise partnership.