03 Mar Calculating Franchise Fees for Your Franchisees
When done well, franchising your business can be a great way to grow and expand your brand and to earn additional income. It also provides opportunities for franchisees to start and establish their own businesses using your proven systems and methods.
One of the decisions you will need to make during the franchising process is what to charge your franchisees. A good place to start is to research and analyse the market and your competition thoroughly, so you can determine the current level of fees. However you also need to have a closer look at your own business, its operating cost and profit margins
Franchise fees of course refers not only to the initial purchase cost, but also ongoing management fees and royalties throughout the life of the franchise.
Factors to consider and evaluate
For the initial fee:
- The costs involved in developing your franchisees – such as initial training, marketing materials and other resources provided, level of support and advice given and royalties.
- Profit margin – if you want to make a profit on the initial fee, you will need to add up all the costs involved and add a percentage. It’s not essential to make a profit on the initial fee. You may choose to cover costs only, and factor higher profitability into ongoing fees. Keeping the initial cost down may also help to make entering into the franchise more accessible and attractive for some franchisees.
- How well established your system is – as your franchise grows and develops, you may want to consider charging a higher fee for new entrants as they will be paying for a more established and proven system.
For the ongoing fees:
- Costs – you will need to factor in ongoing costs and the level of support you provide for franchisees. Different franchisors provide different levels of support – some for instance may chase debts for their franchisees while others expect franchisees to do their own debt collection.
- Profit margin – this will need to be added on to regular costs as for the initial fee.
- Method of charging – this varies between franchises. Some charge their franchisees a percentage of the business they do while others prefer to charge a set monthly fee. Some use a combination of both.
Setting franchise fees is a bit of a delicate balancing act that takes into account the needs of both the franchisor and franchisee. If your initial fees are too high your franchise may not be attractive to potential franchisees, but if they are too low it may cause suspicion and deter those who expect to pay more for a good business opportunity.
At the Franchise Institute, we understand the complexities involved and we can provide professional franchising advice to help you get started. We advise our clients on how to start a franchise with full knowledge of the setup costs involved.
If you are considering franchising your business, one of our franchise consultants can discuss with you the best ways to set initial and ongoing fees, ensuring that all bases are covered and that profitability is built into your franchising system.