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How do you calculate the correct franchise fee?

Posted by Carolyn Dufton on 6 September 2010
How do you calculate the correct franchise fee?

I spoke to a client recently who contacted me because of having challenges growing his franchise network.

The first question I always ask is, how much is your franchise fee?

A correctly structured franchise fee is paramount to the acquisition of new franchisees and the growth of the network.

Many Franchisors I speak to have literally plucked the franchise fee out of nowhere!

Now this method may or may not have worked for you. If it's worked so far then that's great.

Don't try and fix something if it's not broken.

If however.....you are having troubles selling franchises, and even getting that initial enquiry, then it may be time to reassess.

There are various considerations for arriving at the franchise fee.

  • If you have an existing franchise business it is most unwise to reduce the fee lower than the fee that other franchisees have paid despite current financial conditions.
  • It is prudent to offer reasonable entry levels for the new or small franchise network.
  • Don't "give away" franchises to clinch a sale.
  • Don't restrict the network growth by being stubborn and proud with maintaining a high and maybe unrealistic franchise fee. A slow growing network is not healthy.
  • Remember that the initial franchise fee is only part of "the franchising story". Ongoing income through royalties and/or product distribution should be the focus of your income.
  • If you don't get franchisees on board in the first place, you won't have any ongoing income! Don't let an unrealistic upfront fee be a deterrent.
  • You may consider offering franchisee finance as an incentive. Speak to your accountant regarding this and decide if you really want to be acting as a banker to your franchisees.
  • If you are unsure as to whether your franchise fee is appropriately positioned in the marketplace, seek professional advice from a franchising consultant who understands franchising regarding your franchise fee structure.
  • Understand that franchising like other any other industry is currently being affected by lending policies from the banks. Obtaining finance is tough at the moment.
  • Find a financier who is able to offer finance at reasonable rates to your potential franchisees to avoid losing sales through finance.
  • Ensure that the rest of your fee structures are in line with enabling a franchisee to run a profitable business long term.

It's never too late to review your franchise fees.

Franchise network growth should be consistent. Existing franchisees need to feel satisfied that they have bought into a healthy expanding brand. This adds value to their business.

A franchise network with only 2 to 4 franchises after say 2 full years or more of operation is not a healthy network.

Often the one factor holding expansion back is the initial start up fee.

Do not self sabotage your franchise expansion by charging an inappropriate start up fee, it's just not worth it.

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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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