Irish Franchise Blog

Setting initial fees and royalties is a very important aspect of franchising your business. Set them too high and you’ll frighten prospects away. Too low and you won’t make any money.

Fees and royalties should not only reflect the market value of your brand but also adequately support the cost of training, financing and ongoing marketing you will need to provide.

The initial fee should reflect the earnings potential of the business and be proportionate to the total amount of money the franchisee will need to run it. It should not be a major consideration. No point in asking €75,000 if that’s more than the franchisee will gross in his first year, or if he needs to find an additional €250,000 to lease a premises and pay for fit out and stock.

The fee should basically cover the cost of enfranchising someone: i.e, what you will spend on marketing in order to source the prospect and sign him up, and other expenses such as training, technology, and the value of goods you include in the start up package. You can’t be scientific about this, but you should be able to come up with a ballpark figure. Yes, you will make a small profit on each sale–but don’t depend on it. And, for sure, don’t rely on franchise fees for working capital. Wonderful if you are selling a franchise every week, or even one a month. But franchising is a numbers game and there are no guarantees. 

You are not in the franchising business to make a quick kill: you’re in it for the long term benefits. Remember, when you award a franchise you are creating an income stream—from monthly royalties or management fees—for years to come.

While all your franchisees should sign the same contract, there is no reason why they should pay the same initial fee. In the early days, when the franchise is new, I recommend setting a low fee to attract the first batch of prospects. After the first, say, three franchises have been awarded, you can step up the fee to new entrants in stages, and as the brand develops, until you reach the level that is justified and the market will bear.

There are three ways to make money from a franchisee. You can put a mark up on the products you sell to him, charge him a percentage of his gross earnings (usually 6 to 9 per cent) or charge him a flat monthly fee, irrespective of what he earns. Most franchisors charge a percentage, but the flat fee comes in handy if you are in a cash business and you have no control over what the franchisee will earn. You don’t have to worry about bookkeeping and accounting and whether or not your franchisee is giving you the right information or the wrong information. There’s no cheating.

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Delighted with the success of my new client, Tone At Home. After only three months in the franchise market we’ve sold five franchises and the company has been shortlisted for the Best Emerging Franchise 2010 award. The competition is run by the Irish Franchise Association.

Apart from being one of the fastest-growing franchises in Ireland, Tone At Home has also become the largest weight loss and fitness equipment hire company in the country, with more than 500 fitness machines on hire in the Dublin area alone.

Their success is quite remarkable in the current economic environment, and a tribute to the energy and commitment of founders Suzanne Carroll and Stuart Holmes. Getting recognition from the IFA is really the icing on the cake. There’s stiff competition for the Best Emerging Franchise and Tone At Home are up against O2, Caremark, Kids Party Club, and Motivation Weight Management Clinics. The winner will be announced on February 19.

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A mention in the Sunday Times on November 15 led to the first four franchise sales for my newly-launched client, Tone At Home. Four sales in three weeks is about as good as it gets in franchising and signs are that Tone At Home could be one of the success stories of 2010. The leads came directly from the article–the company has yet to start advertising the franchise. 

Tone At Home fills a niche in the multi-million euro health and fitness market in Ireland, offering the latest fitness and weight loss equipment for hire and for sale. They provide a next-day delivery service to homes and workplaces, making exercise easier for people who don’t want to join a gym. Tone At Home is a home-based franchise, and founders Suzanne Carroll and Stuart Holmes plan a move into the UK market next year.

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What’s the difference between a franchise and a licence? A franchise exists between the owner of an identifying trademark and the operator of a business using the trademark when:

• The Franchisee engages in offering, selling or distributing goods or services under a marketing plan or system, prescribed in substantial part by the Franchisor
• The Franchisee’s business is substantially associated with the Franchisor and the Franchisee pays a fee to the Franchisor or an affiliated party, directly or indirectly, in order to engage in the business

The first of these conditions exist when the Franchisor

• Provides the Franchisee with advice and training
• Retains significant control over the conduct of the Franchisee’s business, grants the Franchisee an exclusive territory, or requires the Franchisee to purchase or sell a specific quantity of the Franchisor’s goods or services.

A simple test determines whether the Franchisee’s business is substantially associated with the Franchisor: if the former uses the latter’s trademark to identify its business, it is substantially associated with it.

As for fees, they include payments made by a Franchisee to a Franchisor when signing a franchise agreement and payments made for training and assistance, royalties or inventory. Business relationships that do not satisfy these conditions may be licensing arrangements, distributorships, dealerships, or any one of a variety of other business relationships.

The key question is not whether the business entities entering into the arrangement intend to establish a specific relationship (e.g, a licence rather than a franchise); the key is whether they operate independently, even though one buys and sells goods produced by the other under a trademark.

The relationship between Franchisor and Franchisee, by way of contrast, is a dependent one, as evidenced by the arrangements regarding marketing, training, and the like.

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John and Mel Fisher, the husband and wife team behind Business for Breakfast, the fast-growing networking franchise, have asked me to source a Master Franchisee for Ireland. The Manchester-based company began its international expansion in August with a successful launch in the Czech Republic.  They see enormous potential for BforB in Ireland and have a list of potential franchisees waiting for the Master Franchisee to be appointed.

The search is on! Before advertising the opportunity I am calling people who have previously expressed interest in taking a Master Franchise. People in this bracket are real entrepreneurs who have not only the money but also the management expertise to market such a business. Some have operated a Master Franchise in the past–a big advantage since they’re well aware of what’s involved.

John and Mel’s own business has been hugely successful. They have 35 franchisees and several hundred members who meet in small groups (over breakfast, of course!) and offer each other those all-important referrals. Networking systems like BforB are very popular, the leader in this field being BNI, another franchised operation which is truly international. BNI is well established in Ireland and I hear that most of their territories–especially in the Greater Dublin area–are already sold. Another challenger in this market is Shay Cahill’s Venture Network Business Network which is gaining ground in the Dublin area. Whoever said competition is good for business was absolutely right, and I see a really professional organisation such as BforB making a big impression in Ireland. 

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I spent most of June on the road, or should I say in the air. I was in Geneva, Paris, and Vienna to discuss franchising with two new clients–Ski Republic and Novum Publishing. Both companies are turning to franchising to expand their well-established businesses internationally.

Ski Republic is a new kind of ski equipment hire company which has done to skiiing what Ryanair did to air travel. It has revolutionised the business by offering personal service for much less than the traditional operators charge. Ski Republic has 27 shops in some of the most popular resorts across the Alps and their move into franchising comes as a result of more than 100 inquiries from potential franchisees. Already master licences are being optioned for Austria and Switzerland and the scope is enormous.

What makes this an exceptional franchise opportunity is the money people can earn for just six months work in the winter season. Profits can exceed €100,000. Earnings apart, franchisees get the bonus of working in some of the most beautiful places on earth!

Novum Publishing is also a very attractive franchise. It’s the No.1 co-publishing house in Austria, Switzerland, Hungary and Germany. Since 1997 they have helped hundreds of authors to get their books published. The company provides a complete editing, design and quality print service and promote their works at publishing events and international book fairs.

Recognising an increased demand in the co-publishing market Novum intends to grant franchises throughout Europe in the 12 months.

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I’m delighted to say that I’ve just been elected to the Executive Board of the Irish Franchise Association. It’s a privilege, and may I say a big “thank you” to members who supported my nomination. I’ve long been a enthusiastic supporter of the IFA’s aims and ideals, and have served on the IFA’s Membership Committee for the last two years.  Joining the Board will hopefully enable me to make a more significiant contribution to the affairs of the Association. Apart from endeavouring to boost membership by 30%, we’ve a lot to do this year to promote IFA activities.

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When I talk to would-be Franchisees about a franchise agreement I take them through the main points and always advise them to discuss the agreement with their solicitor. In fact, they’re obliged to that under the terms of the agreement, so that they fully understand what they’re getting into. I never gave much thought to the fee a solicitor might charge for this service– until recently, when a prospect called me to say that her solicitor wanted to charge €2,000 to read over the agreement, warning her that “if I have to do any additional work on it the fee might rise to €5,000.”

What! The quote was outrageously high. Naturally, I told her to find another solicitor. Since then I have been taking great care to advise prospects to shop around. My own research has shown a wide variation in what solicitors will charge to read an agreement–from €300 from a one man practitioner to €900 for a multi-partner Dublin firm. All cautioned that their fee might be higher if they needed to take advice from other sources, or communicate with the Franchisor. Fair enough, but I would seriously question whether this would ever be necessary.

A franchise agreement from a reputable, established, company will be based on a particular format and any solicitor who is familiar with franchising should take no more than 45 to 60 minutes to read it, especially if the agreement comes from a member of the Irish Franchise Association, which will have approved the agreement before admitting the franchise to its membership. In my experience of having sold more than 50 franchises for various clients (and shown the agreement to dozens of other prospects who didn’t proceed for whatever reason) I only ever had one letter from a solicitor. He listed 10 points, but he was simply looking for clarification; he was not challenging the legality of the agreement. But no matter who has issued the agreement, for his own comfort the prospect should have it checked before he signs it.

High prices charged by solicitors to read these agreements might persuade some prospects not to spend the money and this would be a worry.

What’s your experience? Comments please!

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Redundancy is increasingly becoming a fact of life these days. After years of growing employment there has been a sharp upturn in the number of people losing their jobs in Ireland. The Chartered Institute of Personnel and Development predict that redundancies will soar to about 2,270 a week in the period between New Year and Easter, the worst since the 1950s, sending unemployment above the 10% mark.

It’s a very challenging situation, and everyone will have sympathy for those who are going to be effected. Many of these people will have been made redundant once or twice before, and they’re not relishing the prospect of it happening again. Finding another job won’t be easy. The future, surely, for many of them, is in franchising.

Looking back to the early 1990s, when we had the same gloomy conditions, the franchise industry continued to expand and, interestingly, the ranks of the franchisees increased significantly with enterprising people viewing self employment/ business ownership being distinctly preferable to the uncertainties of being an employee. Banks at that time reported that while many “stand alone” new business start ups ended in failure, the great majority who went the franchise route had succeeded. I expect history to be repeated.

I’m not saying franchising offers any guarantees. It doesn’t. Running your own business is not easy and there are risks involved, especially if you’ve never been your own boss before. As with any business, you get out of it what you put in. But at least you’re not on your own. A Franchisee will have the support of the Franchisor who provides a proven business system, ready access to best practice procedures and the tools and collaterals to meet changing circumstances.

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Just back from spending the festive season in Dubai. A remarkable city, known as the Hong Kong of the Middle East, and one of the fastest growing and dynamic markets in the world.

If you’ve never been there I recommend a visit to see what man can build with endless money and a seemingly endless supply of cheap labour from Asia! Dubai has the world’s largest this, that, and the other and its hotels and shopping malls are to be seen to be believed, especially the newest hotel, the futuristic Atlantis, which cost $1.5 billion to build. The owners spent a staggering €20 million alone on the lavish opening ceremony in December.

I was hoping to find some successful indigenous businesses that might want to expand internationally through franchising but I saw nothing to get excited about. On the contrary, the Emirates are more interested in importing franchises than exporting them. The government of the seven emirates that make up the UAE positively encourage franchising and banks there are eager to help young entrepreneurs get into the industry.

About 80% of the population (of about 4 million) are foreigners, so its no wonder all the international big names are there. If you, as a Franchisor, are already international, add Dubai to your locations list. If you are considering international operations, do the same.

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