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[W485]What Is Franchise Fee

by Dennis Schooley, Den

Whether it's hamburgers, pizza, telecom, coffee, Internet, muffler parts, or seniors' services, there are Franchise opportunities available to evaluate. There are great Franchise systems, good Franchise systems, and bad Franchise systems. The challenge is to ask the right questions to find the right system that will fit your goals and dreams. The key is to ask the questions – and listen closely to the responses. Only then can you determine if the Franchise opportunity is the right fit for you. So whether it's food services like burgers or coffee, professional services like telecom or IT, or manual services like cleaning or oil changes, ask the questions and record the answers.

Why Do I Pay A Franchise Fee?

Franchising is a strategy that the Franchisor uses to achieve its objectives, including market penetration and market domination. Franchises are granted or awarded to a qualifying Franchise Candidate that has similar objectives in their own marketplace. That Franchisee will have the responsibility to fully implement the operating and marketing systems of the Franchisor in their defined area for a specified period of time. The relationship is not generally one of parity.

If it were a relationship of parity, the Franchisee would take on a great deal more responsibility, and of course, liability and risk as well. So the relationship is not one of actual partnership in the legal sense. However, good Franchise systems will generally recognize their Franchisees as Strategic-Partners, meaning they are in a partnership of sorts that is aimed at achieving unified goals, but not one of legal partnership or equity.

The Franchise Fee is the cost of putting the Franchisee into the business of the Franchisor, not as a partner, but as a participant. Costs include:

1) The development costs of all of the elements of the Franchisor's system

2) Training the Franchisee to use those system elements and programs

3) Marketing and advertising to find Candidates

4) Costs of qualifying Candidates including rejecting many unqualified Candidates

5) Salaries, travel, & administration

6) Legal expenses to draft agreements defining the methods & terms for the Franchisee to participate, etc.

It is the Franchisor's assessment to cover those costs as well as a reasonable markup. In other words, it's the entry fee to the point of the completion of the initial training programs.

To the Franchisee it must represent a reasonable fee to allow you to become a part of the existing system, including all of the training programs that are a part of that system, to help you reach your own business goals.

When asked about the Franchise Fee, the Franchisor should have this concept clearly defined in their approach to Franchising. They should recognize that the Franchise Fee should be reflective of the value of entry into a well-developed, comprehensive system for the participant Franchisee. They should also recognize it as the recovery of costs to find, qualify, and grant legal rights to participate in that system to the very best Franchisees for the Franchisor's business.

If you have searched for a franchise opportunity to buy, perhaps you have become frustrated at the upfront franchise fee that that franchisor is asking. $25,000.00, $35,000.000, $50,000.00 or more sounds excessive, right?
Not so fast. Before one can determine if the amount is right or wrong, one should have a good understanding for the reasons that the franchisor uses in setting the franchise fee.

The franchisor has a recognizable name and proven business model. The franchisor wishes to expand his empire. He likely does not have the capital or manpower to do so efficiently and profitably. So, he chooses to franchise and “lend” his name and business plan to someone else. What is the value of utilizing a recognizable brand name? What is the value of being able to utilize a proven business model?

Franchisor's have considerable marketing costs. They probably only convert 1 out of 50, 100, or 200 interested buyers or more into a franchisee. I am sure that this ratio varies with each franchise opportunity. They have to sift through a lot of sand to find the gold.

Franchisor's will have costs associated with bringing on a new franchisee. There will be a training session for key employees which could last for weeks. A Grand Opening, marketing materials, accounting processes, and other preopening necessities will be provided. These can be very costly.

As you can see, the costs associated with bringing on any new franchisee can add up quickly. In reality, franchisor's rarely make a profit with the franchise fee. It merely covers costs. In fact, for many franchisors, it doesn't even cover their costs. So if this is true, why franchise in the first place? The answer is royalty fees. Franchisors will always receive some form of royalty payment from their franchisee. These amounts will vary with each franchise opportunity, but usually they are a percentage of sales. Now that is where the franchisor profits. Granted, the franchisor will continue to provide support to the franchisee. But this level of support will not be as necessary over time as the franchisee becomes more and more knowledgeable about the business. So usually the longer the relationship with the franchisee, the more profitable the relationship becomes for the franchisor. In other words, it is in the franchisors best interest to make sure that the franchisee is successful.
If you are still on the fence as to whether or not to pursue a franchise opportunity, do not let the franchise fee scare you. In the long run the franchise fee will probably be negligible anyway. You will likely (hopefully!) pay much more money to the franchisor in royalty fees over many years than you will in an upfront franchise fee. After all, if you are paying high royalty fees to the franchisor, doesn't that mean that sales are good?
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Both Dennis Schooley & George Morten St are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Dennis Schooley has sinced written about articles on various topics from Software, Franchise. . Dennis Schooley's top article generates over 1300 views. to your Favourites.

George Morten St has sinced written about articles on various topics from Business Intelligence, Franchise Opportunities In and Decision Making. Jark Barry. George Morten St's top article generates over 5400 views. to your Favourites.