How Do Franchisors Make Money?
January 31, 2017 5:26 PM
Becoming a franchisor is a big decision and one you should not make likely. If you are a business owner who has had great success and are now looking to expand, franchising your business can give you tremendous growth if you do it the right. As a franchisor you are investing a good amount of money so you need to make sure that you have a solid business plan that will bring you financial success.
Here is how franchisors make money.
The franchise fee is a flat fee that the new franchisee pays up front when you sign the franchise agreement. The reason for an initial franchise fee is to help recoup the money you spent on setting up the franchise and the cost of recruiting, training and supporting franchisees. By paying the franchise fee, your franchisee gains the right to use your brand name and to sell your products and services as well as get support for getting their unit up and running.
Most franchising experts warn that when developing your payment structure, you should not charge a high initial fee. For a truly successful franchise business, you need to have successful franchisees. It is truly a dependent relationship which means you should truly invest in the success of your franchisees. If you are more focused on earning your money from those initial fees instead of your royalty fees then you might be tempted to sign on franchisees that really are not a good fit just for that upfront money.
Basically, your franchisees are paying for your intellectual property and the system you put into place to help them run their unit. It is a percentage of the franchise unit’s gross sales and are typically paid on a monthly basis. When your franchisees are successful and ringing up a lot of sales then you are successful too. Remember if your franchisees fail, then it affects you as well. The royalties is what gives you a vested interest in how the franchisees are doing. You want them to do well so you do well too.
Besides franchise and royalty fees, many franchisors also charge certain add-on fees. You can require your franchisees to buy certain products to run their business whether ingredients or equipment or promotional items. You can arrange it to either manufacture and sell them directly to your franchisees or arrange a deal with the manufacturer to get a cut of the profit.
Another source of income could be add-on fees for advertising or systems management or technology. You should not only use the money you earn from these fees to operate your corporate headquarters, but also to invest back into your franchises.
Ultimately what it comes down to is that successful franchises means you are successful as a franchisor. Just because you have a successful business however doesn’t automatically mean your brand will be successful as a franchise business. Here are some tips for developing a successful franchise:
If you don’t have a unique product or service, then your franchise won’t be successful. You also need to create a good support structure for your franchisees otherwise they are doomed to fail. In an effort to conserve money, some new franchisors will only get a lawyer to help them develop their franchise, but there are so many other aspects of the business that you might also need support in like developing your business plan and creating a training program and a marketing campaign strategy. Franchisee recruitment is another area where you could use some support.
Many franchise consultants also recommend that you have a couple of successful company owned units before branching out into the franchise business. That way you know that there is a market for your product or services big enough for more than one store. You should also do some market research to ensure there is enough customer demand for competing locations. It is also good to research the probability of you being successful in other cities and even other countries. Before you make a big investment like this you should see how far you can realistically expand.
Here are some important questions you should have answered before embarking on this major journey:
- What fees do you plan on charging and how much? What percentage should the royalty fee be?
- What size territory will you offer each franchisee?
- Which locations will you offer units in?
- What will your training program look like? How will you run it and how long will it last?
- What is your marketing strategy?
- What experience and net worth will you require of your franchisees?
- Will you require your franchisees to buy certain items from you?
You should also make sure you have the money to get your franchise business off the ground. Unfortunately, some franchisors fail because they underestimate all the legal and regulatory fees involved. Besides having a lawyer on staff, you should have an accountant experienced in the franchise business as well. Franchised business are audited once per year. Marketing campaigns also cost money and you will have to hire recruiters to help you attract potential franchisees. Two other pitfalls to avoid are lack of planning and becoming a franchisor too soon. Even if you typically find success as the fly by your seat of your pants type of guy or gal, this type of investment requires a lot of planning. If you rely on your gut instincts alone, you will hit a lot of road blocks on your way to success. Don’t let a lack of planning stop you from becoming a successful franchisor. Another important thing to keep in mind is that make sure you have been running your business for a while before deciding to franchise it. If you jump at the first sign of success, you might have a lot more kinks to work out along the way.
A franchise development firm can help you with all areas of franchise development. If you decide to go that route, make sure you do a lot of research and interview a few franchise development companies before you pick one. You want to make sure that they have your best interest at heart.