If you have searched for a franchise opportunity to buy, perhaps you have become frustrated at the upfront franchise fee that that franchisor is asking. $25,000, $35,000, $50,000 or more sounds excessive, right?
Not so fast. Before one can determine if the amount is right or wrong, one should have a good understanding for the reasons that the franchisor uses in setting the franchise fee.
-The franchisor has a recognizable name and proven business model. The franchisor wishes to expand his empire. He likely does not have the capital or manpower to do so efficiently and profitably. So, he chooses to franchise and “lend” his name and business plan to someone else. What is the value of utilizing a recognizable brand name? What is the value of being able to utilize a proven business model?
-Franchisor’s have considerable marketing costs. They probably only convert 1 out of 50, 100, or 200 interested buyers or more into a franchisee. I am sure that this ratio varies with each franchise opportunity. They have to sift through a lot of sand to find the gold.
-Franchisor’s will have costs associated with bringing on a new franchisee. There will be a training session for key employees which could last for weeks. A Grand Opening, marketing materials, accounting processes, and other preopening necessities will be provided. These can be very costly.
As you can see, the costs associated with bringing on any new franchisee can add up quickly. In reality, franchisor’s rarely make a profit with the franchise fee. It merely covers costs. In fact, for many franchisors, it doesn’t even cover their costs. So if this is true, why franchise in the first place? The answer is royalty fees. Franchisors will always receive some form of royalty payment from their franchisee. These amounts will vary with each franchise opportunity, but usually they are a percentage of sales. Now that is where the franchisor profits. Granted, the franchisor will continue to provide support to the franchisee. But this level of support will not be as necessary over time as the franchisee becomes more and more knowledgeable about the business. So usually the longer the relationship with the franchisee, the more profitable the relationship becomes for the franchisor. In other words, it is in the franchisors best interest to make sure that the franchisee is successful.
If you are still on the fence as to whether or not to pursue a franchise opportunity, do not let the franchise fee scare you. In the long run the franchise fee will probably be negligible anyway. You will likely (hopefully!) pay much more money to the franchisor in royalty fees over many years than you will in an upfront franchise fee. After all, if you are paying high royalty fees to the franchisor, doesn’t that mean that sales are good? |
