Posted in Buying a franchise on June 17, 2011
When thinking about franchise cost it’s normal to think about the franchisor being in the same boat as you and as being dependent upon your success. In truth they are in a different business – the business of supporting your franchise.
Make sure that the costs of being in business stack up. Consider choosing a franchise that makes most profit when you are profitable, rather than raking in the profits even when you’re having a tough time.
Here are seven ways your franchisor can make a profit from your franchise business…
1. Franchise fee – your lump sum investment to purchase the franchise.
2. Regular royalty payments – your regular payments to the franchisor for the privilege of using the brand name and systems of the franchisor to do business.
3. Product sales – if you buy and sell products that are exclusively provided by the franchisor, they can add a margin to make profit before you sell. In this way, the franchisor is acting as your exclusive wholesaler and can profit comfortably from the arrangement.
4. Rent – if your franchisor buys your building and rents it back to you, they are operating in the property market while your trading as a franchisee. They’ll cover their property mortgage payments with the rent you pay and benefit from having a tenant that’s tied to their franchise agreement too. There’s a lot been written about McDonald’s franchise about property ownership.
5. Updates and improvements to systems – Since you have to operate to the standards defined by the franchise, they may be legally allowed to make you invest in new systems or services that they create for the franchise. If they do this with additional monthly subscription fees, it can be very lucrative for them.
6. Training and Conferences – It’s quite likely that you’ll have to attend quarterly or annual conferences with your franchisor. If they charge for these, you may want to confirm that they are charged at cost only and that there is no charge for the franchisors time involvement.
7. Giving your time away for free – You might not realise it, but when a franchisor asks you to help another franchisor and does not offer to pay you for it, they’re charging you a “membership tax”. Because you’re successful you’re expected to go help out other franchisors for free. Make sure that any support you’ll be expected to give to other franchisees is paid or supported in other ways, rather than just being a cheap source of training and support to the franchisor.
Hopefully you’ll see here that there’s more than just the up front fee and monthly royalties involved in the cost of a franchise. Check out The 7 Myths Of Franchising to find out more by entering your name and email address in the box at the top of the page.