Making Money As A Franchisor

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Franchisor investment

Originally uploaded on 26/12/2017. Updated on 16/04/2019.

If you run a successful business, franchising is a great way of boosting revenues. Not only will you receive income from franchise fees, but you will also experience the benefits of having a network of brand ambassadors promoting your brand. When they are based in different locations around the country, or even the world, they can communicate to an audience that is beyond your reach.

With that in mind, it is worth considering what benefits franchising can offer to your brand. Whether you want to start up a pet, van-based, education or locksmith franchise, this is a business model that can be seriously game-changing for your business.

How do you earn money as a franchisor?

The Upfront Fee

To cover the costs that come with starting a new franchise in a new location, most franchisors charge an upfront fee as compensation. Founding a franchise often requires new, branded equipment, renovations and training, and those costs mount up fast. However, its worth considering that high initial fees can be really off-putting to potential franchisees; perhaps try spreading the cost across a series of payments that can be paid off annually.

Royalties Based on Revenue

Franchisors also make money from franchisees by claiming royalties. These often come in the form of a percentage of the revenue generated by the franchisee - known in the business as a management service fee which, according to the BFA, averages at around 8.5 percent.

To franchisees, this might seem like a bit of a tough deal. They have likely spent thousands of pounds to start up their business, as well as paying an initial franchise fee. But you have to consider that the cost of franchising your business is not just restricted to the initial start-up costs. You also have to pay up to protect the quality of your brand across your franchise network, and that doesnt come cheap. As a franchisor, you will be expected to provide regular training, development programmes and marketing campaigns to ensure just that.

If done right, this recurring source of income will do more than cover costs. It will also fund the further expansion of your franchise network into new territories. Therefore, royalties encourage an effective way of doing business: both the franchisor and the franchisee feel the benefits when business goes well. That encourages a healthy business strategy that works for both parties.

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Royalties Based on Net Sales

Some franchisors may charge royalties based on the franchisees net sales. They can be somewhat higher, averaging at around 6 to 10 percent.

Equipment and Supplies

For quality assurance, a franchisor can specify which equipment and suppliers the franchisees should use, which ensures the businesses maintain high standards of customer service and product quality. This can be an effective way to get collective buying power, where purchasing products in bulk for the entire franchise network gives the franchisor the bargaining power to get considerable discounts. With this type of franchise model, savings can be passed on to the franchisees, who will incur lower overall costs and increase their revenue. This means the franchisor can continue to make more money from the royalties.

Economies of Scale

This leads to another very interesting point, which is that franchisors can achieve greater economies of scale the more franchises there are in the network. The bigger the network is, the more negotiating power you will have with suppliers, who may be willing to provide even bigger discounts for very large orders.

Adapting to Market Patterns

One thing a franchisor has to bear in mind when it expands is that it will be entering regions which can be worlds away from the local market that they serve. This is particularly true when a franchise expands across borders, on continental and even worldwide scales. Franchisors are, therefore, going to have to be prepared to adapt to the tastes and trends of different markets.

McDonalds is a company that has fallen foul of its own lack of pragmatism in the past. When Forbes pointed out that the fast-food chain was damaging profits by failing to adapt to different worldwide markets in 2015, McDonalds had to fork out millions of dollars to adjust its product lines. If this problem had been anticipated before the company had expanded into foreign territories, it would have saved a lot of money.

By 2017, McDonalds had introduced new menus for different countries that took into consideration customer preferences outside of the US. For instance, the fast-food chain unveiled a guacamole chicken sandwich to appeal to more health-conscious consumers.

Training and Support

By providing adequate training and support to your franchisees, you can help them get their feet off the ground to maximise their chance of success. Like with equipment and supplies, this is another indirect way of increasing your income from royalties.

Marketing

Invest in integrated marketing campaigns to advertise your franchisees in their local area as well as regionally, nationally or internationally. A franchisor can also ask franchisees to contribute a portion of their gross sales to a marketing fund.

Renewal Fees

Franchisors can also earn money by charging a fee to franchisees wishing to renew their contract. This franchise model also accounts for the general costs the franchisor will incur for a renewal, which may include additional legal and administrative costs. Again, like with other charges, its important to charge enough to ensure you can make some profit, but not too much to discourage your franchisees from renewing their terms.

Sublet Rent Upcharges

It may be possible for a franchisor to lease premises for a lower rent than what the franchisee could negotiate. The franchisor could then upcharge the rent to its most profitable franchises to make some extra income of its own.

Events

Franchisors can charge franchisees to attend mandatory events such as product launches or promotions to earn supplementary income, although some may only charge to cover the costs of arranging the event.

Training Fees

Although many franchisors provide training that is free at the point of delivery (funded by the royalty fee), some may prefer to charge for training, so they can cover the cost directly, depending on what franchise model they follow.

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