What’s a franchise fee worth?
Every franchisor charges a franchisefee, a lump sum of money that you’ll be required to pay when you sign afranchise agreement. Typically, these fees range from $10,000 (sometimes less)to $50,000 (rarely more), and they’re paid in advance of attending the franchisor’sinitial training classes. By collecting the money upfront, franchisors avoidteaching their “secrets” and then trying to collect their money. They also donot negotiate the franchise fee – everyone pays the same amount.
Is it too expensive?
Youprobably expect to pay a franchise fee, but if you’re like many other prospectsyou’re wondering: “Why is the franchise fee so expensive?” It’s one of the mostcommon questions asked during The A to Zs of Buying a Franchise, the mostpopular symposium offered at expos produced by MFV Expositions.
To answer thatquestion, it’s helpful to ask another question: “Compared to what?” When peoplesay the franchise fee is too expensive, what are they comparing it to? A goodcomparison would be the cost of starting the business independently, withoutbuying a franchise. So let’s take a look at that.
To start a newbusiness you need an idea. With a franchise, the idea already exists, and it’sbeen developed as a real business. What’s that worth?
Cost of developing an idea
But let’s say you’vegot a good idea. How much will it cost you to develop the idea into a business?Consider the cost of research, licenses, permits, making contacts withsuppliers, hiring employees, finding a location, etc. And we’re not talkingabout getting it all perfect. We’re just talking about getting started, duringwhich time trial and error can cripple a new business.
You may not know thetype of location you need until you’ve opened a couple of units and discoveredwhat’s wrong with the locations. You may not know the type of employees youneed, or how to train them properly, until you’ve hired and fired a few! Butthat’s not the case with franchising. A good franchisor provides guidance andsolutions and keeps you from making costly errors. What’s that worth?
The cost of attracting customers
Even the best ofideas and businesses need customers. How will you attract them? You’ll need todevelop a marketing and advertising plan, possibly including print ads andtelevision commercials. What’s your advertising expertise? You can hire an adagency, but have you done that before? Have you negotiated media fees before?Good franchisors already know how to attract customers, and they know what itwill cost. What’s that worth?
What’s your operatingplan for your business? Who does what? When? How? Who can you rely on toprovide equipment, supplies and inventory? Who can you call when you’ve got aproblem? Again, good franchisors provide an operations manual with guidelines,recommendations and requirements to help you build your business efficiently. Theyalso provide training and support staff to assist you not only during thestart-up of your business, but for as long as you’re a franchisee. What’s thatworth?
Profit for the franchisor?
In spite of all thebenefits a franchise fee produces, some prospective franchisees still aren’tsold on paying the fee. Some claim, “The franchisor is making a huge profitfrom the franchisee fee.” Is that a fact?
Before you buy afranchise, you can ask the franchisor to show you how your franchise fee getsspent. You may discover that most of your franchise fee is re-invested in youthrough training and support. In other words, you’re paying for an educationthat will help you succeed in a business of your own. What’s that worth?
And what if thefranchisor makes a profit from the franchise fee? Do you want to join afranchisor that doesn’t make a reasonable profit? How long will that franchisorbe able to provide you with the expertise you need to succeed as a franchisee?
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