Posts Tagged ‘Franchising’

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.

Despite the challenges in the economy, “2008 was a year of expansion for many franchises, with the total number of franchise systems now reaching 838 – an increase of 3.6% on the 809 systems recorded last year. ” Furthermore, according to the 2009 BFA/NatWest Survey, “franchisors’ expansion ambitions remain bullish, with an average of nine new franchise units planned over the next 12 months. The newer systems are looking to expand at a greater rate with an average of 14 new franchise units.”
A few more finding from the survey include:

While the majority (60%) of franchisors and franchisees (66%) think that general economic conditions will become more difficult in the next 12 months, 82% of franchisors anticipate that that their business will improve or stay the same over this period, compared to 95% last year, while the remaining 18% expected business to become more difficult.

Franchisors and franchisees were taking positive action to protect their businesses against tough trading, with nearly a third increasing their advertising, a fifth improving productivity, 15% lowering prices and nearly a quarter increasing their existing client base.

Although the number of individuals employed in franchising has not risen over the last 12 months, the franchising sector still represents employment for 467,000 or 1.3% of the UK workforce.

Estimated start up costs have declined, and new entrants can expect to pay £50,400 in franchise fees and other associated costs to their franchisor, down from £64,900 last year.

It should be noted that this is the 25th annual research study among franchisors and franchisees by the British Franchise Association. The report concludes that overall, the Franchise industry in the UK continues to grow and is a key employer. Although recessionary pressures are being felt, the industry shows strong signs of resilience thus far. Brian Smart concluded, “It’s clear from this survey that the franchise sector is proving resilient to the economic downturn by investing heavily in activities to drive business forward and ensure future success. It is a mark of the enthusiasm and commitment of franchisors and franchisees that they continue to drive new business and retain it with such vigour.”