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Quite a few elements influence the initial Franchise Fee charged by a franchise fee. Some franchise corporations make the mistake of setting their franchise fee based solely on what their competitors are charging. Though this may well seem to become a sound technique, the issue is that not all franchise systems are created equal, regardless of no matter whether they operate in the similar market.

When establishing the initial Franchise Fee, it is actually critical to keep in mind that despite the fact that the Franchise Fee can undoubtedly support a company's money flow and help in sustaining the company's initial growth, the royalty fee income and revenue from the sale of merchandise and/or services to Franchisees should really be the key supply of income with regards to the long-term profitability from the franchise operation. Organizations that attempt to make a massive profit from the initial Franchise Fee may possibly come across that they're discouraging qualified candidates from looking past the substantial fee.

When assisting clients in franchising their business, element of the improvement process entails our determining an appropriate Franchise Fee (and also other costs) that balance the franchisor's financial demands using the desires from the franchisee relative to their total initial investment. We do this by evaluating quite a few different factors.

With Franchise Fees wildly fluctuating even amongst related type franchise firms, to a potential franchisee the Franchise Fee could appear to become based on a "throw it around and see if it sticks" strategy. However, when the Franchise Fee is correctly established depending on a thorough evaluation of particular components, it can be very easily justified (and understood) by a prospective franchisee.

When determining the initial Franchise Fee, we evaluate the following:

1. The sophistication and/or uniqueness in the technique; two. The possible ROI and profitability of the Franchise Business enterprise; and 3. The Franchisor's costs and expenses connected with the acquisition and grant in the franchise.

When taking into consideration differences within the initial Franchise Fee of two comparable franchise providers operating in an established business (i.e. pizza), the third category is exactly where considerably of the difference among franchise costs can often be identified.

Thefranchise feecosts and expenditures may well include things like:

* Allocation for franchise improvement costs * Allocation for franchise advertising and marketing expenses * Franchise acquisition costs which includes sales fees (i.e. sales commissions) and also other related expenses (i.e. advertising and marketing supplies, personnel) * Expenses related to coaching new franchisees and delivering on-site help and/or website choice help prior to or during the franchisee's grand opening period. Franchisors may decide to contain some or all of those expenditures inside the initial Franchise Fee. * Other challenging fees incurred by the Franchisor in establishing a new Franchisee (i.e. training materials, supplies, gear) if these costs are inclusive in the Franchise Fee.

As stated previously, the initial Franchisee Fee may also be based in component on the prospective ROI and profitability of the Franchise Organization. Not surprisingly, this may only be shared using a potential franchisee by Franchisors who've made the essential disclosure within the Disclosure Document relative to "financial performance representation." Otherwise, these factors will only be tangible to potential Franchisees once there are quite a few franchises operating under the franchise system.

For franchisors who usually do not make economic efficiency representations (as well as the majority do not), the company's franchisees could choose to share their economic efficiency with prospective franchisees. So because the number of franchises increases, it becomes much easier to get a potential franchisee to evaluate the monetary possible from the franchise. This is why it is typical to determine Franchisors increase their Franchise Fee over time. As the number of franchises increases, the franchise enterprise gains additional credibility (and believability) for possible franchisees. In essence, later stage franchisees are investing in more of a "sure thing," which can justify a larger Franchise Fee.

So the question remains, what percentage from the Franchise Fee does a Franchisor normally "net?"

Once again, this will vary tremendously in massive element depending on the elements discussed. In addition, some franchise organizations decide to "break even" on the Franchise Fee to lower a franchisee's barrier to entry when it comes to the total initial investment. Others franchisors may truly decide to "lose" cash on the Franchise Fee with the justification that they are going to make it up lots of instances over using the ongoing royalty fee generated by franchisees.

This getting mentioned, it isn't unusual for a Franchiser to "net" 25% or more with the total Franchise Fee (officially "gross profit"). It's also essential to keep in mind that a portion of the Franchise Fee typically includes a recoup of specific expenditures that the Franchiser previously incurred (i.e. franchise development expenses, production of advertising and promoting materials, marketing expenses, and so on.). So the net money flow generated from the Franchise Fee is typically greater than the gross profit. As a result, the gross profit generated from the Franchise Fee increases as added franchises are granted and some of these fees are totally recouped.

There is an art and science to establishing the initial Franchise Fee and also other fees connected with all the franchise (i.e. continuing royalty fee and advertising charges, which I talk about in a further write-up). When establishing the Franchise Fee, franchisers need to very carefully evaluate the various components discussed in this short article as they relate to their franchise. Performing so will help make certain that the initial Franchise Fee is fair to each the franchiser and franchisee instead of a cause to query the Franchiser's true motives.

Steve Vandegrift is President of FranSource International, Inc., a full-service franchise improvement and consulting firm founded in 1997. FranSource functions with both startup and current franchise feeproviding the expertise required to begin and keep successful franchise operations.