Choosing the Right Franchise Fee Makes All the Difference
The Right Franchise Fee
Franchise Marketing Systems is a franchise development firm who’s primary focus is in supporting companies in becoming a franchise organization and transitioning to becoming a franchisor. During our time in franchise development over the past fifteen years, we have had the opportunity to work with a wide variety of brands and industry segments experiencing the transition to scale. Franchise Marketing Systems first phase of developing a new franchise model is to create the fee structure and to define the financial model that will most efficiently allow the model to replicate. One of the most significant aspects to defining a new franchise is creating the franchise fee and “putting a price” on the franchise offering. The Franchise Fee is what the franchisee pays at the start of the relationship, it is paid when the franchise agreement is signed unless the buyer is located in a state which requires the franchisor to do a fee deferral or escrow (Typically, California, Illinois, Maryland, New York, Virginia, Washington). Many times, establishing the fee may seem like a simple task with little consequences to which direction the fee might have, when in reality, this is one of the most important aspects of successfully franchising a business model.
The Franchise Fee is a source of revenue and profitability to the franchisor and primarily serves as a tool to manage expenses associated with growth. Franchise Fees are critical to the franchisor at all stages of growth, but during the first years of expansion, the Franchise Fee can literally make or break the entire system if not properly structured. There are multiple ways to define a new system’s franchise fee, Franchise Marketing Systems typically starts with a cost-plus model to appropriately define what expenses will go into the franchisee after the signing and then adding margin to this expense…similar to pricing a good and accounting for cost of goods sold. The expenses that are associated with a new franchise sale are some of the obvious items like training, travel, commission dollars for recruitment and others which need to be accounted for. A Franchise Fee should also account for indirect expenses associated with franchise growth, such as marketing dollars to generate the franchise leads, opportunity cost associated with time and energy expended for each franchisee and general overhead and expenses associated with building the franchisor organization. All of these items can be identified and appropriately accounted for, but it takes time and thought to plan it out. The old saying of it’s better to “Ready, Aim Fire”, than “Fire, Aim, Ready” holds true here.
Franchise Marketing Systems then recommends that a new franchise business review the market and understand where the averages are for the industry segment they are entering. If you are in the sandwich business, confirm what other prominent brands are doing before you go to market. The Franchise Fee needs to “match up” with the prominent brands in the sandwich segment, such as Jimmy John’s, Subway, Jersey Mike’s, Blimpie’s or others that could be defined as key competitors. We typically recommend that you price a new franchise at a discount to others in the market who have validation and are ahead of your launch, but not to the extent where you cheapen the value of your franchise brand. Generally a fee that is within 25% of the leaders in your segment will be close enough, but still show humility to a potential investor that you know your position and understand that they are accepting a risk should they invest with you. As the system expands, the Franchise Fee can increase and should go higher in value as the number of units grows and the brand catches on. The Restoration 1 franchise offering started at $15,000 in 2010 and today, the individual franchise is sold for $49,000 which is justified by the 160 locations throughout the U.S. and Canada.
Ultimately, when launching a franchise system, the Franchise Fee is one of the critical factors that must be addressed and thoroughly considered. If you are looking into the option of franchising your business, contact Franchise Marketing Systems for a free consultation to review this and other elements of your potential franchise model.
Christopher Conner, President
Franchise Marketing Systems