Setting the right fees is one of the most important decisions a franchisor will make. If you’re about to dive into franchising, determining what to charge your franchisees is essential for ensuring financial viability, fairness, and success for both you and your franchisees. Let’s explore the key considerations you need to factor in.
A. The Standard Fees
Franchise fees are typically broken into two categories: the initial franchise fee and ongoing fees. Our article here explores the typical fees further. The initial franchise fee is a one-time charge paid upfront by the franchisee when they first buy into your system. It covers the right to use your brand, access training, and other initial support. This fee can vary widely depending on your business model and the industry you’re in. Common ranges are between $20,000 to $50,000, but some fees are higher.
The ongoing fees are paid regularly, typically monthly or quarterly, and are usually based on the franchisee’s revenue. These include royalty fees and marketing fees. The royalty fees are a percentage of the franchisee’s gross revenue and help cover continued support, while the marketing fees go towards brand-wide advertising and promotions.
B. Fixed or Percentage-Based Fees?
One of the biggest decisions you’ll face is whether to adopt a fixed fee or percentage-based fee model for your ongoing charges. Traditionally, percentage-based royalties have been the go-to for franchisors. The advantage here is that as your franchisees grow, your royalties increase proportionally. Franchisees also feel more confident since they are paying based on their actual performance, rather than a set fee, which can fluctuate based on market conditions.
However, fixed fees are becoming increasingly popular. The main reason? They’re predictable. Your franchisees will know exactly what they’ll owe each month, regardless of how much revenue they generate. This can provide stability, particularly in tough economic times. But, fixed fees can also feel daunting for franchisees in the early stages when revenue might be low, and they’re still covering their initial investment. Here, grace periods can be incorporated into your model, where those fees are waived or reduced for a fixed period.
There are pros and cons to both models. The percentage model adjusts with the franchisee’s success, but it can be harder to predict your revenue as a franchisor. A fixed fee offers stability for you but might be harder for newer franchisees. Many franchise lawyers are seeing a trend toward fixed fees, so it’s worth considering based on your franchise model and industry.
C. Financial Viability is Key
When setting your franchise fees, it’s critical to ensure that both you and your franchisees remain financially viable. This is where financial modelling comes into play. As a franchisor, you need to establish a fee structure that allows you to provide the necessary support and development for your network, while also ensuring your franchisees can thrive.
Franchisees need to break even within a reasonable timeframe. For instance, if a franchisee signs a seven-year lease for a fixed premises and incurs significant expenses for fitout and equipment, they should be breaking even within 18 months. This will give them a real shot at success and will make your franchise system more attractive to prospective franchisees.
Work closely with an experienced accountant and franchise lawyer to model various scenarios and determine a fee structure that works for both parties. Don’t forget: both franchisor and franchisee need to win.
D. Competitor Analysis
Before finalizing your fee structure, it’s crucial to conduct some competitor analysis. You should get a sense of what other franchises in your industry are charging. This doesn’t mean you need to match their fees exactly, but it will give you a clearer picture of where your franchise fits in the market. Potential franchisees are likely to compare your offer against others, so you want to be sure your fee structure aligns with what they can expect. Ask your franchise lawyer if you need help researching competitive franchise agreements.
E. Get Some Runs on the Board
If you’re just starting your franchise system, it’s worth considering discounting the initial franchise fee for your first few franchisees. These early adopters are taking on more risk with an unproven franchise model and possibly a brand that doesn’t yet have widespread recognition or goodwill. Offering them a discount on the initial fee acknowledges this risk and encourages them to come on board. Once you’ve got some runs on the board and your franchise system is more established, you can start increasing fees for new franchisees.
F. Build in Flexibility
Your fee model shouldn’t be set in stone. As a franchisor, you’ll need to account for changes in operating costs, inflation, and other factors over time. Consider including provisions in your agreement that allow for adjustable fees. For instance, fees that increase based on the Consumer Price Index (CPI) can help ensure you’re not locked into an outdated fee structure that no longer covers your costs. You may also want to consider how increased operational costs will impact your franchisees and adjust accordingly.
G. Stay Legally Compliant
Finally, don’t forget the legal side. When crafting your fee model, you need to be aware of relevant legal obligations, including those in the Franchising Code of Conduct, the law of penalties, and unfair contract term (UCT) laws. Work with a franchise lawyer to ensure your fees comply with legal standards and that they won’t be considered excessive or unreasonable by the courts or regulatory bodies.
In conclusion, deciding what to charge your franchisees involves a careful balance between your financial needs and theirs. Standard fees, financial viability, competitor research, and legal compliance are all factors that will shape your fee model. Consulting with a franchise lawyer and accountant will help ensure you’re on the right track and setting your franchisees up for success.