Quite a few factors impact the initial Franchise Fee charged by a franchise fee. Some franchise corporations make the mistake of setting their franchise fee based solely on what their competitors are charging. Although this could appear to be a sound method, the problem is that not all franchise systems are made equal, regardless of whether or not they operate inside the exact same market.
When establishing the initial Franchise Fee, it is critical to keep in mind that while the Franchise Fee can unquestionably support a company's cash flow and assist in sustaining the company's initial growth, the royalty fee income and income from the sale of products and/or services to Franchisees must be the significant source of income when it comes to the long-term profitability from the franchise operation. Companies that attempt to make a huge profit from the initial Franchise Fee might find that they are discouraging qualified candidates from looking past the substantial fee.
When assisting customers in franchising their business enterprise, element of the development course of action entails our determining an appropriate Franchise Fee (as well as other fees) that balance the franchisor's monetary requirements with all the demands with the franchisee relative to their total initial investment. We do this by evaluating several diverse variables.
With Franchise Costs wildly fluctuating even among similar sort franchise businesses, to a potential franchisee the Franchise Fee may possibly seem to become based on a "throw it around and see if it sticks" method. Nonetheless, when the Franchise Fee is adequately established according to a thorough evaluation of particular factors, it could be quickly justified (and understood) by a prospective franchisee.
When determining the initial Franchise Fee, we evaluate the following:
1. The sophistication and/or uniqueness with the process; 2. The potential ROI and profitability of the Franchise Company; and three. The Franchisor's expenses and expenditures connected using the acquisition and grant in the franchise.
When contemplating differences within the initial Franchise Fee of two similar franchise corporations operating in an established sector (i.e. pizza), the third category is where significantly with the difference among franchise charges can generally be discovered.
Thefranchise feecosts and expenditures may well incorporate:
* Allocation for franchise improvement expenses * Allocation for franchise marketing and advertising expenditures * Franchise acquisition fees like sales costs (i.e. sales commissions) and other related expenditures (i.e. promoting supplies, personnel) * Expenditures connected to training new franchisees and offering on-site support and/or web page choice help before or in the course of the franchisee's grand opening period. Franchisors may choose to include things like some or all of these expenses within the initial Franchise Fee. * Other difficult fees incurred by the Franchisor in establishing a new Franchisee (i.e. education supplies, supplies, gear) if these expenses are inclusive of the Franchise Fee.
As stated previously, the initial Franchisee Fee may also be based in element on the possible ROI and profitability in the Franchise Business. Naturally, this may well only be shared with a prospective franchisee by Franchisors who have made the essential disclosure within the Disclosure Document relative to "financial performance representation." Otherwise, these factors will only be tangible to prospective Franchisees the moment you will discover a variety of franchises operating beneath the franchise technique.
For franchisors who do not make economic performance representations (as well as the majority usually do not), the company's franchisees may well choose to share their economic performance with potential franchisees. So because the quantity of franchises increases, it becomes a lot easier to get a prospective franchisee to evaluate the monetary potential in the franchise. This is why it can be popular to determine Franchisors enhance their Franchise Fee over time. Because the number of franchises increases, the franchise company gains additional credibility (and believability) for prospective franchisees. In essence, later stage franchisees are investing in additional of a "sure thing," which can justify a higher Franchise Fee.
So the question remains, what percentage in the Franchise Fee does a Franchisor commonly "net?"
Again, this will vary tremendously in significant portion according to the factors discussed. Furthermore, some franchise organizations choose to "break even" on the Franchise Fee to minimize a franchisee's barrier to entry when it comes to the total initial investment. Others franchisors may well truly choose to "lose" funds on the Franchise Fee with the justification that they are going to make it up numerous times over with the ongoing royalty fee generated by franchisees.
This becoming stated, it isn't uncommon to get a Franchiser to "net" 25% or additional in the total Franchise Fee (officially "gross profit"). It is also essential to don't forget that a portion with the Franchise Fee usually consists of a recoup of certain costs that the Franchiser previously incurred (i.e. franchise development expenses, production of marketing and advertising supplies, advertising expenses, and so on.). So the net money flow generated from the Franchise Fee is usually greater than the gross profit. Consequently, the gross profit generated from the Franchise Fee increases as more franchises are granted and some of these fees are completely recouped.
There is an art and science to establishing the initial Franchise Fee and also other costs linked using the franchise (i.e. continuing royalty fee and advertising charges, which I talk about in a different write-up). When establishing the Franchise Fee, franchisers ought to carefully evaluate the several factors discussed in this article as they relate to their franchise. Doing so will enable guarantee that the initial Franchise Fee is fair to each the franchiser and franchisee instead of a cause to query the Franchiser's accurate motives.
Steve Vandegrift is President of FranSource International, Inc., a full-service franchise improvement and consulting firm founded in 1997. FranSource works with each startup and current franchise feeproviding the expertise necessary to start and keep profitable franchise operations.