Franchise Marketing Systems is a franchise development firm who\u2019s primary focus is in supporting companies in becoming a franchise organization and transitioning to becoming a franchisor.\u00a0 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.\u00a0 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.\u00a0 One of the most significant aspects to defining a new franchise is creating the franchise fee and \u201cputting a price\u201d on the franchise offering.\u00a0 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). \u00a0Many 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.<\/p>\n
\u00a0<\/span><\/p>\n 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.\u00a0 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.\u00a0 There are multiple ways to define a new system\u2019s 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\u2026similar to pricing a good and accounting for cost of goods sold.\u00a0 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.\u00a0 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.\u00a0 All of these items can be identified and appropriately accounted for, but it takes time and thought to plan it out.\u00a0 The old saying of it\u2019s better to \u201cReady, Aim Fire\u201d, than \u201cFire, Aim, Ready\u201d holds true here.<\/span><\/p>\n \u00a0<\/span><\/p>\n 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.\u00a0 If you are in the sandwich business, confirm what other prominent brands are doing before you go to market.\u00a0 The Franchise Fee needs to \u201cmatch up\u201d with the prominent brands in the sandwich segment, such as Jimmy John\u2019s, Subway, Jersey Mike\u2019s, Blimpie\u2019s or others that could be defined as key competitors.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Ultimately, when launching a franchise system, the Franchise Fee is one of the critical factors that must be addressed and thoroughly considered.\u00a0 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.\u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Christopher Conner,\u00a0 President<\/span><\/p>\n Franchise Marketing Systems<\/span><\/p>\n