Why would we expect to see flat fee royalty payments in home-based franchises but revenue-based royalties in franchises operating from commercial buildings?Hint: Among the most popular home-based...

Why would we expect to see flat fee royalty payments in home-based franchises but revenue-based royalties in franchises operating from commercial buildings?

Hint: Among the most popular home-based franchises are cleaning services offered to businesses, and delivery services for seniors who live at home.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The reason for this is that the home-based franchise is less likely to make very much money.  

The franchise agreement will be set up, of course, to make as much money as possible for the franchisor.  In a business where the revenues are not likely to be all that high, the franchisor is more likely to be able to maximize revenue by taking a flat fee from the franchisee.  That way, the franchisor makes money even if the franchisee does not.  More commercial franchises, on the other hand, are much more likely to make a lot of money.  A McDonald's is more likely to bring in a great deal of revenue than a cleaning service.  Therefore, the franchisor wants to have a percentage of all of the (hopefully large) revenue stream.  They do not want to limit their potential profits by simply taking a flat fee.

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