Setting the Initial Franchise Fees

Many factors influence the initial franchise fee that is charged by a franchisor. Some franchise companies make mistakes with their franchise fees based only on what their competitors are charging. Although this may appear to be sound strategy, the problem is that not all franchise systems are created equal, regardless of whether they operate in the same industry.

When setting the initial Franchise Fees, it is important to remember that although the Franchise Fee can certainly help the company's cash flow and help in maintaining the early growth companies, a royalty fee income and revenue from sales of products and/or services to the franchisees should be the primary source of income in terms of the long-term profitability of the operations of the franchise. Companies that try to make huge gains from the initial Franchise Fee may find that they turn down candidates who qualify from look past the big costs.

When helping clients in their business franchise, part of the development process requires our determination of the proper Franchise Fees (and other costs) that balance the franchisor's financial needs with the franchisee needs relative to the total of their initial investment. We do this by evaluating a number of different factors.

With franchise fees fluctuate wildly even among similar companies to potential franchisees, franchise franchise fees may seem to be based on "throw it out there and see if it sticks" approach. However, when properly established Franchise Fee based on a thorough evaluation of the specific factors, it can be easily justified (and understood) by potential franchisees.

When determining the initial Franchise Fee, we evaluate the following:

Sophistication and/or the uniqueness of the system;
The potential ROI and profitability of business franchise; and
Franchisor fees and costs associated with the acquisition and the granting of the franchise.

When considering differences in initial Franchise Fees the two companies operating in a kind of franchise industry founded (i.e. pizza), the third category is where many differences between franchise fees can often be found.

Franchisor's costs and expenses may include:

The allocation for franchise development costs
The allocation for advertising and marketing cost franchise
Acquisition costs include the cost of franchise sales (i.e. sales commissions) and other related costs (i.e. personnel, marketing materials)
Costs associated with the new franchisee training and support in place and/or assistance in site selection before or during the period of the opening of the franchisee. Franchisor may choose to include some or all of these costs in the initial Franchise Fee.
Other hard costs incurred by the franchisor in building new Franchisees (i.e., training materials, supplies, equipment) If this fee is inclusive of franchise fees.

As previously stated, the initial Franchisee Fee can also be based partly on the potential ROI and profitability of the business franchise. Of course, this can only be shared with prospective franchisees by the franchisor that has made the required disclosure in the document Disclosure relative to the "financial performance representations." If not, these factors will only be apparent to prospective franchisees once there is a number of franchises that operated under the franchise system.

For the franchisor makes no representations that the financial performance (and most don't), franchisee companies may choose to share their financial performance with prospective franchisees. So the number of franchises escalated, it became easier for prospective franchisees to evaluate potential franchise finance. This is why it is common to see the Franchisor increases their franchise fees from time to time. Because the number of franchises franchise business profit increases, the more credibility (and trust) to prospective franchisees. Basically, the next stage of the franchisee invest in more of a "sure thing," which could justify the higher cost of the franchise.

So the question remains, what percentage of the cost of a franchise do the franchisor usually "clean?"

Again, this will vary largely based on the factors discussed. In addition, some companies choose to franchise "break even" on the franchise fee to reduce barriers to franchisees to enter in terms of total initial investment. Another franchisor can actually choose to "lose" money on franchise fees with the justification that they would make it many times with ongoing royalty fees generated by the franchisee.

There is art and science to build the initial franchise fee and other expenses related to the franchise (i.e. fee keeps the royalties and advertising fees, which I discussed in another article). When setting the franchise fee, franchisees should carefully evaluate the various factors that are discussed in this article because it is related to their franchise. Doing so will help ensure that the initial Franchise Fee is fair for both franchises and franchisee is not a reason to question the true motives of the franchise.

Setting the Initial Franchise Fees 2014-06-02T08:07:00-07:00 Rating: 4.5 Diposkan Oleh: Unknown