Fixing on the fees for your franchise offering isn’t easy. But it’s one of the most important decisions you can make
When you bring a franchise to market the first thing you need to consider is ‘what do I charge?’ Given that every situation and every business is different, there is no set formula for setting the sales price, nor the royalty percentage of a franchise. However, there are some unwritten rules you can follow.
The first rule is that you must be transparent. It’s only right that a prospective franchisee questions you on what is included in the franchise package cost and what they’re going to get for their ongoing royalties. To this end, you need to set out a comprehensive breakdown of your franchise set-up costs. From my point of view, the franchise package should cover the costs involved in developing the brand and the system, plus the cost of training and marketing the launch of the franchisee. The main objective isn’t making money out of the initial franchise package but you do need to be able to cover your costs.
The second thing you need to do is determine the level of support you anticipate providing and then set your price accordingly. The franchisor is there to provide both guidance and advice but also training, marketing tools, programmes, collateral, procurement, plus technical and sales support throughout the period the franchisee is in the franchise. To this end, franchisors must charge royalties commensurate with the support and service to be provided.
When it comes to how you actually structure the fees there are generally three methods available to you: product mark-up, fixed fees or a percentage of turnover.
A mark-up is used primarily in manufacturing businesses that make products and sell these to the franchisee. Here the franchisor makes the bulk of their income from the mark-up charged. Meanwhile, fixed fees are unusual and not really liked by the franchise community nor by the bfa but can be found in cash-based businesses. This is where a fixed monthly fee is charged irrespective of turnover or profit. Perhaps the most popular model in the franchise world, percentages of turnover provides what most consider to be the fairest arrangement, ensuring an incentive and reward for both franchisor and franchisee alike.
Some say that setting a price for a franchise is both an art and a science. But it’s more a function of common sense and the ‘reasonableness test’ – that is, does it feel right? Do I think it is fair? Can we both make money out of the arrangement? If the answer to these questions is ‘yes’, then you have probably got it about right.