A Guide To Setting Franchise Fees

06/02/2018 17:00 | Start a business

Setting franchise fees

So, you’ve worked hard to build your business and have chosen the franchising route to expand your brand. Being able to offer exciting franchise investment opportunities to prospective franchisees is a great feeling, but it can be tough to put a franchise cost on your beloved business.

Setting the franchise fee can be emotional for first time franchisors. You want to ensure that both you and the franchisee receive an adequate return on your investment, but the business is your baby after all, and you don’t want to undervalue it. This is a fine balancing act that you must get right for your franchise to appeal to prospective franchisees.

Franchise development costs

As a new franchisor, there are several costs that you’ll incur whilst you’re establishing your franchise network:

  • Set up: When you’re first starting out you’ll be faced with the franchise cost of developing all the required elements for your new franchise. By far the costliest and time consuming part of this task will be the creation of all the crucial franchise documentation. You’ll need to seek professional advice about developing the franchise agreement, operating manuals, training programmes, brochures and marketing material.
  • Promotion: Now that you have the franchise structure in place, it’s time to make prospective franchisees aware that you have one of the best franchise investment opportunities for them to consider. To do this properly through a mix of franchise exhibitions, digital marketing, and advertising, you’ll need to invest a significant amount to your marketing budget.

  • Recruitment: When your marketing endeavours pay dividend, you’ll have the job of reviewing responses from wannabe franchisees. Of all the stages in setting up your franchise, this is the one you should spend the most time, effort and money on. To make sure that you select quality candidates an effective recruitment process should be developed. Don’t cut corners. Conduct several interviews, perform background checks, confirm that they have the right amount of capital needed. Investing time and resources at this stage will save you more in the long term.

  • Training: When the perfect candidates have been selected, you now need to dedicate a huge amount of time and energy on training them. The franchisees will have chosen to invest in your franchise largely based on the training programme being offered to prepare them to successfully set-up and operate their businesses. It’s in your best interests to ensure that the franchisees are fully primed and ready to make a profit.

Setting the fees

There’s no getting away from it; the franchise cost incurred during the set-up phase will have been substantial. You must now accept that it will probably be some time before your newly franchised business will make you a profit. But, you’re in this for the long-term, so the time comes to setting the fees.

• Franchise fee

It can be tempting to base your franchise fee on what other franchisors in your sector are charging, or even more worryingly, just plucking a number out of the air. It’s important that you spend time getting this figure right or you may risk putting off potential franchisees who can’t see past a ridiculously high or low initial fee. You should base the fee on several factors that can be easily explained and understood by investors.

So, you need to consider how unique your business is compared to other franchise investment opportunities, it’s potential profitability, and how much it cost you to set-up the franchise. A fee based on these elements should be fair to both you and your franchisees.

Remember that you should view the franchise fee as a chance to recover a some of the costs associated with recruiting and training the franchisee, and not as a way of making profit. It could almost be likened to a joining fee. You’ll reap the rewards of selecting the right franchisee further down the line from the profits they’ll generate when they’re up and running.

• Ongoing fees

The on-going fees, or royalty fees as they’re also known, are a regular payment that your franchisees will pay to cover the cost of the support and guidance that the franchise model provides. This is generally charged as a percentage of turnover.

Just as with the franchise fee, setting the royalty fee at the right level can be tricky. If it’s too high, then franchisees will presume a high level of support in return. If the support available doesn’t meet their expectations, this could lead to franchisee dissatisfaction. On the flip side, if you set the fee too low, it could result in you not making enough of a profit to reinvest money back into the business. Either of these outcomes could lead to the failure of your franchise.

A happy medium should be achieved whereby you can afford to provide the support that your franchisees deserve, and your franchisees are able to make enough of a profit to run a successful business.

• Marketing fees

In addition to the on-going royalty fee, you may also charge your franchisees a smaller percentage of turnover to cover marketing costs.

One of main reasons why your franchisees will have chosen to invest in a franchise is the benefits that come from being part of a bigger brand with national recognition. If you are to offer this level of brand awareness advertising, then each franchisee contributes to the marketing pot.

Over time the marketing fund will become quite considerable, so it’s worth involving your franchisees in the decisions on how to spend it. By engaging the opinions of your franchisees, not only will you receive some great ideas that hadn’t previously been considered, but you’ll also empower your investors. Knowing that they are contributing towards an important element of the franchise gives franchisees a sense of control and satisfaction.

The longevity of a successful relationship between franchisor and franchisee relies on both parties being able to make a profit. The foundation of this relationship is built on getting the fee structure right. Find the right balance and both you and your franchisees will reap the rewards.

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