Many people who independently investigate franchising are often overwhelmed with the fees associated with franchising. Most people are familiar with the franchise fee. The franchise fee is a one time up front fee that franchisees pay to be part of the franchise. It is typically not a revenue generator for the franchisor as franchise fees are used to cover the cost associated with recruiting and training new franchisees.
Franchisors therefore makes money from collecting royalties from their franchise owners. Royalties generally fall into two categories: a flat fee or a percentage of gross sales collected monthly or weekly bases. It is in their best interest for the franchisees to be successful because the more money they make, the more money they make.
Many companies also have a marketing or advertising fee. This can be a small cost in a retail type business that has a sign that offers exposure to the potential customer, but in other types of businesses (those service based) the cost of finding customers can cost a significant amount.
There can be a separate fee called a territory fee. It is a fee franchisees pay for the protected rights for a specific geographic market. It can be based on pure population, by postcode or county or some division of population such as 50,000 people who have £50,000 incomes or better. In many instances, this fee is wrapped up into the franchise fee.
Either way, it is not the monthly percentages or pounds in fees that franchisees should be as concerned about, but rather at the end of the day (less fees paid to the franchise) are they putting the amount of money in their bank account that they desire. It is for this reason why I encourage all my franchisee candidates to stay with the investigation long enough to speak with existing owners and build a financial model. Only then will they truly
understand whether or not the business is truly financially viable.
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