Passive income is a form of earning money without materially participating in the activity from which the income is derived. There are two definitions for the reader to understand. There is the common business definition and the tax code definition.
‘Royalties’ is a traditional a term used in the publishing and entertainment industry, it is a term now used in franchising. Royalties are the earnings related to the work done to create the respective material or for an idea. Royalties are most identifiable to earnings for copyrighted work. Royalties are commonly paid in the music, publication, or for licensed work.
The primary reason for the franchise arrangement is the increased net profit for the franchisee in using the franchisor’s name, logo, brand, or trademark. The franchisor charges an upfront fee called a Franchise Fee, monthly Royalties, in some agreements a License Fee and Marketing/Advertising minimums. These additional costs to the franchisee are paid to use the franchisor’s name.
Every franchise agreement should discuss the issue of the source of customers. This is known as the geographical territory, protected territory or exclusive territory. Many agreements spell out the zone or area of your customer source. It is important to understand the Geographical, Protected or Exclusive Territory Clause in the Franchise Agreement.