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Can franchise fees ever be too low?

Posted by Carolyn Dufton on 17 March 2010
Can franchise fees ever be too low?

Ever heard a complaint about being charged too little for a product or service?

No it doesn't happen often does it?

But it occurred to me whilst flicking through the pages of a business magazine that some Franchisors do appear to be charging too little.

I came across a Franchise organisation with around 50 franchises and "many in the pipeline" so the reader was led to believe.

The ongoing monthly fees were minimal and there was no marketing fee.

So I began to wonder..........

How many new franchise systems pluck a franchise fee out of the air?

How many new franchise systems pluck their monthly royalties out of the air?

....and  what are the repercussions for a franchise network with franchisee fees that  have not been researched and analysed?

Let's consider the following;

  • A Franchisor needs to be profitable.
  • A Franchisor is in business and should be in business to make money.
  • Franchise fees may be the only income producing source for  The Franchisor.
  • Alternatively a Franchisor may be a manufacturer or a wholesaler of goods to the franchisees in which case fees can be set lower as The Franchisor enjoys profit from the on sale of goods.
  • If there is limited franchisee income, will The Franchisor reduce the level of service and support accordingly?
  • Will the Franchisees ultimately suffer from paying low fees?
  • If there is a double whammy of low fees and no marketing fee, what support are the franchisees receiving?
  • Is the concept of charging a low ongoing franchise fee a deliberate strategy to excuse poor franchise support?

Franchise fees need to be structured to enable The Franchisor to provide an efficient franchise support system. The Franchisor's operation  is the engine room of the Franchise network and should run effectively for the benefit of all franchisees.

This franchise operation generates its own costs. Franchisees are a Franchisor expense and the costs need to be covered by an income source.

Often when I speak to existing Franchisors in a coaching environment, it becomes apparent that when setting up the franchise system the costs that are incurred in running a franchise operation  had not been considered. The anticipated income from franchise fees had been regarded as an unencumbered income source.

A Franchisor  "going bust" is a nightmare situation for Franchisees. It is a situation that should be avoided at all costs.
Part of a franchisee's pre-purchase due diligence should include the analysis of The Franchisor's financial records for the sole purpose of assessing The Franchisor's solvency and their general financial standing.

A Franchisor who is charging franchise fees at random, and not monitoring the real costs of running a franchise could be putting the system in jeopardy.

The structuring of franchisee fees should be done in consultation with franchise experts and/or accountants who understand the criteria for setting an equitable fee.

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Carolyn DuftonAuthor: Carolyn Dufton
About: Carolyn Dufton Dip. Bus (Franchising) heads the team as the owner and manager of franchisingplus. Carolyn has a wealth of small business experience, and many years of hands on franchising experience.
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