Why there’s no profit in a £25,000 franchise fee.
This blog about a typical franchise fee is for Franchisors to consider and Franchisees to appreciate. Potential franchisee’s think franchisors make a lot of profit on the initial fee. Not so in our experience.
Those who know what I’m talking about understand that for some brands the process of franchising a business can often be more profitable than the business itself. This is because each franchise sale has an immediate profit element in it. But that doesn’t mean that the profit is still there 6 months down the line. As a new franchisor, you need to mobilise that cash flow to get the new members buzzing. Go on – splash the cash! There are some franchise consultants who would say that the franchise fee should be just enough to launch the franchise etc etc. This is always a mistake. In reality, it’s actually impossible to do anyway because no franchisor truly knows the cost of getting each franchisee trained and to a point where they can be self-sufficient (ish).
It’s death by a thousand cuts
It’s management time that is the death by a thousand cuts for an underpriced franchise. Over time there is a physical and therefore financial cost attached to every member of a franchise network. Every phone call, every email, every face to face visit, every mile of petrol and hotel room. So I believe that as a new or existing franchisor you’ve got to have a decent initial margin in the franchise fee to cover that time and the expense. Perhaps, more importantly, this allows the management team to relax about the time and costs associated and to willingly be available to every franchisee until the royalty supports your activity with them. If you are worth £50 an hour then start adding those hours up. It’s not long before you’re into many thousands of pounds of cost.
You’ve still got to guess it
Let’s say you’ve decided on a £25,000 franchise fee for your brand. I would hope that you’ve considered how much of the franchise sale profit goes into brand marketing, nationally and locally. You will, of course, have accurately costed out the inventory/stock etc that is included within the franchise fee won’t you? Oh, and the cost of trainers, advisors. A savvy franchisor will also estimate the recruitment cost of each franchisee in marketing and advertising terms. That is to say, if you commit £10,000 to a franchise show and recruit 2 franchisees then they have cost you £5,000 each. That needs to be costed in too. So too does a commission for your franchise manager, many, but not all, will get a commission on sign up.
You’re in it for the long term
It’s nigh on impossible to cost in the support time over the first 6 months, which I think you should do as a minimum. Some may take longer, much longer, some shorter, but your commitment should be open-ended if you’re a great franchisor. Have a think about your own franchise and typically how long it is before the royalty pays for the support. When you get to that point, if there’s any money left then you’ve made a profit on the franchise fee. But most won’t.
To illustrate the point here’s a typical scenario for a B2B supplier:
- Franchise Fee £25,000
- Recruitment cost in marketing terms per franchisee, say £3,000
- Franchise Sale Commission £2,000
- Inventory / Admin etc £1,000
- External Trainers £1000
- Internal Training say 5 days Est’d at £3,000
- Post training support from everyone in the company say 100 hours @ £50 = £5,000
- Petrol and hotels for in territory support 6 visits / 6 days in six months say £4,000 inc hourly rate, petrol, hotels, meals etc
- National / Local marketing £3,500
- Margin £2,500
That margin of £2,500 can just as easily turn into a loss if there’s a cost overrun or more time. There’s very little fat in a £25,000 franchise fee. These figures are very variable for different franchisors so there’s no exact science here but in a later blog, we’ll detail how some franchisors intentionally risk a loss to accelerate the franchise network growth. In doing so they usually create a profit long term through higher royalty. More on that in the next blog!
Author Andy Cheetham has 26 years experience owning and advising franchisors. Follow him on linkedin here