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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