Royalty Fee

Has anyone had any experience with paying a royalty fee for a product? Or does anyone have any experience with purchasing a recipe for production? The building I have contracted for was a well established local meat/deli/catering company. All the equipment is still inside and I have contracted to purchase most of it. In closing the deal a unique or maybe not so unique opportunity arose. The previous owner and son expressed interest in selling me out right the recipe or leasing it for a monthly fee as it seems to me at this point both are options. This particular product is very localized and is not available in any other markets that I am aware of but has become a great staple in my area. The previous owners were in business for 20 years and decided to retire in May of this year and have agreed to lease me the building. They have stated that numerous customers are wondering how they could get this product if they are no longer in business and quite simply they cannot get the same quality or quantity of the product anywhere else. They have been inundated with request to stay open or to open seasonally so that they may still get this product during the holidays (very selfish if you ask me). As the call for there products is greatest at that time of year the older owners even considered this if they were unable to rent the property to the right individuals. So I guess my question is, if anyone has any input, what if any amount is a good percentage to pay for such a royalty? This product in my estimation can generate about 80 to 150 thousand in annual sales(from my level not the old owners).

It is my understanding that 2% to 7% is the royalty a co-packer pays to use and market a brand that they do not own…If the “brand” has a good following, this can be good for both…

Talk to me…what kind of product are we talking about? A numer of years ago I came across an individual who bought a pizzeria and also paid $25,000.00 for the dough formula and procedure. Pizza dough formulas can be effectively reverse engineered for a whole lot less than that. In your case, you’re going to pay that royalty for how long? And how much will that be over the length of the royalty contract? Look at your other options before making your move. With that said, with a picture of the product, and a couple sentences describing it and how it’s made, someone here at the Think Tank might be able to jump right in and provide you with a formula and procedure, or at the very worst, I might be able to formulate a very similar product for you at a much more reasonable cost.
Tom Lehmann/The Dough Doctor

Tom the product in question is not pizza related necessarily. It is OX Roast (roast beef in au juis) and the only real ingredients are spices and obviously cook time and preparation and packaging techniques. I appreciate your willingness to help and I have garnered so much useful knowledge with dough and other recipes from the recipe bank. I didn’t know if it was something that occurred often enough for anyone to have input. The 2-7% range was where I would have hoped it would be (Thank You Royster). The gentleman who created the recipe has the best around, all you have to do is ask “where can I find the best OX Roast?” and 9 times out of 10 whomever you are asking will tell you this guy. It is sold in all of the super markets in town utilizing their own recipes (and packaging tricks I might add), and this person supplied a large convenience store chain(around 30 local stores locally) with it along with meatballs that they used in their subs. That contract I would like to try and get for my business if the money is right for volume. Oh and he has supplied other pizza shops with the meatballs as well. I am told from even the most casual consumer that all you had to do was walk by or drive by this place in the early morning and the smell from the exhaust fan would have you craving his Ox Roast, meatballs or sausage it was part of the landscape for 20 years. But I am a true believer in the caveat if it sounds too good to be true it is.So I am optimistic but very leery all the same. I was just looking for a little insight into royalty or purchasing.

Talk with him to determine what kind of volume you “think” will do. Figure the food and paper cost of making the product to determine the gross profit margin. Subtract your “prep” labor involved in the process. Unless you figure this first, there really is no point trying to figure out a good royalty rate.

Typical restaurant royalties are anywhere from 2% to 5% plus advertising (not always).

Personally, if I could determine the sales I would much rather buy the recipe outright. If you try to do that later he may figure you’re making good money at it and raise the price.

You also run the risk of not keeping the “existing sales” of the product simply for the reason you are “not” the original owner. This can be overcome in time, however, if your product is the same or better.

Oh, how important those little details are. Yep, it sure looks like you’re going to be looking at royalty fees.
Tom Lehmann/The Dough Doctor

If you can strike a deal to lease the recipe month to month, you only need it one time to alter 1% of one ingredient and it is no longer their recipe, therefor you do not need to continue paying them for it. This is the reason one cannot patent a recipe. All it takes is for ONE change and it is no longer that recipe anymore technically but is so close that it could have duplicated it on a day where the scale was uncalibrated LOL. Thats my $.02 for stealing a recipe haha… sorry.

Is it the “recipe” that you want or the “brand”?..If it is just the “recipe”, send a sample to a lab and they will come pretty close to what is in it…But I suspect is this case, it is the “brand” that has all the value…

AH Royster is correct it is the Brand that has all the value in my opinion. The recipe is Great, however I feel the packaging that they utilized along with the Name is what is going to drive the sales here. Thanks for the input all.