Here's a conversation I've had more than once with clients and CEOs of franchising companies. It's about upfront franchise fees.
The conversation typically starts with the C-level executive saying: "We make our real money on royalties & not on franchise fees."
And I oblige them with a quizzical response of: "Wow how does that work or what do you mean?"
I then hear something on the order of well, if we had 50 (or pick a number) highly qualified franchise candidates a year, we would give the franchise fee away to them in favor of making all that royalty revenue.
And on its face this sounds logical and even attractive. What franchisor wouldn't want to do this? They could even have the CFO dream up a great Excel spreadsheet showing obscene profits from royalties to convince the board of directors that this is a good idea.
Here's the reality.
Unless you are a franchisor with an unlimited and inexhaustible supply of qualified candidates you don't have 50 great prospective franchisees to give away your franchise fee to.
I almost always ask the franchising executive - okay do you have 50?
And of course you already know the answer to that question!
So, I ask them: "How much would you pay for that list? How would you finance it? Maybe ... with franchise fees?"
Even McDonald's who does have a waiting list for franchises charges a franchise fee.
Here's my list of what you need your franchise fee to cover.
- Franchise salespeople are assets and you need franchise fee revenue to pay for the best.
- A great franchise sales, recruitment and selection process requires resources to ensure you get the results you want.
- Having a low fee or no franchise fee won't sell more of your franchises and it may sell less.
- Great franchise owners are recruited. You need a budget to market to your target audience of potential franchise investors.
- Franchise buyers look at the total development cost and do their own calculation of return on investment. And if your franchise fee doesn't support an attractve franchise investment you don't have a franchise fee problem. You have a unit economics problem.
If you need help looking at your franchise fee structure and competitiveness call me at 443.502.2636 - [email protected].
H & R Block is one franchisor that walks the talk of low initial franchise fees. It traditionally only charged a nominal initial fee, but has among the highest royalties in the business. It had unique circumstances: a dominant market postion and fast growth using subfranchisors. Real estate and hotel franchises also often have nominal initial fees, for a different reason - their franchisees typically are converting from another brand or need relatively little training.
In general, however, your point is well-taken; franchisors need to carefully set the initial fee to meet market conditions.
Gary, I think Joe's point is different.
Franchise fees within a vertical look pretty similar.
But, it is unlikely that each brand has similar costs of acquisition.
So, franchise fees should vary if they are to reflect the costs of acquiring a franchise operator.