When I first started in franchising, like most people I thought that franchisors sold a franchise and franchisees bought it. However, I was soon put in my place by Moshe Gerstenhaber, founder of Kall Kwik and my mentor, who educated me that good franchising was in fact an effective and efficient form of system leasing. And when you think about it as leasing a system, things actually make more sense.
When you buy a product or service, you get something that is defined and fixed. You buy the shoes, wear them and eventually throw them out. You never buy a pair of shoes then take them back to the shop after a year and say that because your feet have changed you need them altered. Conversely, with a franchise you’re always in discussion with the cobbler; the franchisor is constantly reviewing and refining their system.
So if you think of the arrangement as being like a lease then franchisees should be getting a system that’s always live and thus constantly subject to change, upgrades and improvement. But in order for franchisees to access this live system and take advantage of the constant alterations, tweaks and refinements it benefits from, there’s a range of costs applicable.
Firstly, there’s the licence fee, which gives the franchisee the right to use the franchisor’s system, brand and trademarks. It also allows them to take advantage of all the investment that’s gone into developing the process, methodologies, collateral and tools that are intrinsic to the business. The cost of the licence will vary across franchisors but generally it will be around 25% to 40% of the total cost of the franchise. Any higher and you should ask why.
A franchisor needs to have an ongoing revenue stream and this is achieved through a management fee – otherwise known as a royalty. Payment of this ongoing lease cost entitles the franchisee access to the system, support, tools, programmes, advice and head-office personnel. And, again, this rate will vary from franchisor to franchisor.
Licence and management fees are the main costs associated with buying a franchise but there could be further costs, depending on the business type. These may include the shop fit, equipment, training, marketing launch programme, finance package or contact management system.
As a franchisee, you need to determine if the franchise package offers you value for money. Take advice from a bank, an accountant or both to put together a proper business plan. Interrogate the franchisor about their support and speak to existing franchisees to ensure you’re absolutely clear about what the franchise package includes. That should ensure your franchise is as comfortable as an old shoe for years to come.