Being a franchiser is not an easy task. It is a huge decision. If you are a businessman and want to expand your business all over the world, franchising business is a great way to earn a lot of revenue. As a franchisor, you will have to invest a considerable amount of money, so make sure you are spending on a company with solid business plans that will bring financial success.
People who are new at the franchisor side in the franchise industry, or want to become a franchisor, think that the primary source of income from a franchise system comes in the form of franchise fees. For example, when a franchisee buys a franchise, he will pay an initial amount of buying that brand name or product, or any service.
Many franchisors report that the above assumption is wrong. They mostly get their income from the royalties. That means that when a franchisee buys a franchise, the franchisee will pay a certain amount of payment. It can be done daily or can be given at the end of the month. Payment can be in the form of a flat rate or a certain percentage of turnover. The franchisor tries to make a short-term loss on selling a franchise business to make a long-term profit from the franchisee through royalties.
Following are a few solid reasons by which franchisor make money:
Investment cost of the franchisor
Franchisor indeed makes money from their franchisees. The point is that franchisors invest in a new franchisee, and the average break is around 18-22 months. This can be surprised those who believed that the initial fee or investment cost is where a franchisor makes their profit.
The investment cost of a franchise is to cover the franchiser’s price for bringing a new franchisee that will typically include covering a selection of the following:
- Employee Costs
- Training Fees for employee
- Extra effective website development
- Future marketing Plans
- Support Systems
- Technology development
- Document Writing and Consultation
- Legal Costs
This is the route followed by the majority of franchisors. It is known that many franchisors use the franchise fee to gain profit. This technique has led the issues in the past where a franchisor tries to attract as many franchisees as possible without considering if they will be successful. This means they are not concerned if the franchisee makes a profit or not. They want to get their benefit.
Initial Franchise fee
The franchise fee is a necessary fee that the new franchisee pays when he signs the franchise agreements. The initial franchise fee is to help the franchisee for not spending a lot of money on setting up by the franchise, for example, training and supporting franchisees. By paying the franchise fee, franchisees have the right to use your brand name, sell your products and services, and get support for getting their unit up and running.
Many franchising systems warn that when developing your payment structure, you should not charge a high initial fee. An independent relationship indeed means you should truly invest in the success of your franchisees. If you are focused on earning your money from these initial fees instead of your royalty fees, you might be tempted to sign on franchisees.
Franchisors royalty fees
Franchisees are paying for your property and the system you put into place to help them run their unit. It is a percentage that franchisees have to spend every month. The royalties are what give you a vested interest in how the franchisees are doing. You want them to do well, so you do well too.
As a franchisor, your main focus is to achieve a state where your royalties cover all the franchise system overheads. You want to receive the maximum amount of fees from each franchisee. But, this does not mean to increase the percentage you receive from their profit. What we mean by this is to increase the amount of profit a franchisee receives. If your franchisees’ business grows a lot, they will produce more profit each month, in return, you will also get more percentage.
So, to answer this whole point, a franchisor makes their money by ensuring that their franchisees succeed, and in return, a franchisor will receive a more substantial royalty fee.
How can you increase your royalties?
Following are the pro points on how can you increase your royalties:
The first step to increase the royalties you receive from your franchisees is to hire a franchisee who is loyal to his job and has an interest in doing this. Some people are suited to franchising and your franchise model, so hire those that can make your business successful. If you get this step right, then the next step becomes easier.
The second step is, try to reduce the time before the franchise unit starts to make money. You can do this by providing a boost at the start of the operation. Make sure they have the support necessary to hit the ground running. This can be done in different tasks, but some help can be in the form of:
- Train employees before the franchisee’s employees are ready to take over.
- please provide them with the best technology and equipment from the start
- Visit the franchise unit at the start of business to address any concerns the franchisee might face initially.
The third step is to identify the weaknesses you have to face in your royalties. This I because your franchisees are not working correctly. Once you have an idea of which franchisees perform poorly, you can visit that franchisee and fire them.
It is essential to know if you want to increase royalties, you will have to become honest and open with your franchisees. If you put off difficult franchisees, you will quickly find out that they will negatively impact your royalties.
Have a look at the high-performance franchisee
It is very important to take a long-term view of your franchisees and the profit they are generating for you, for instance, staying too focused on the short-term. It is like that any franchisor will ask a franchisee who is very sure and produced consistently good results, but who has hit a temporary block, due to health problems, staff members, or any other issues. If this happens, the franchisor will consider canceling some of the franchisee’s debt or offering him a loan to compensate for cash flow problems. Know that the franchisee-franchisor relationship has some specific terms of the franchise agreement, and the franchisor can bend the terms of the deal in ways that benefit both parties.
Have a look at the low-performance franchisee
If you notice that one of your franchises is not performing well, examine the franchise system, then the franchisee. Avoid blaming on franchisee until you are sure that the problem is with the franchisee themselves rather than the franchise system.
Low performance come in two main categories: first is franchisees that are failing to meet sales targets, and the second is franchisees who have bad attitudes toward customers.
Before signing an agreement with the franchisee, you should be careful about your revenue. Remember that your franchisees represent the brand as a whole: if a franchisee is rude to customers, this will damage the whole reputation of the entire brand.
Extra funding fees
Besides franchise and royalty fees, many franchisors also add charge some extra costs. You can order your franchisees to buy certain products from you to run their business. You may give them in the form of promotional items. You can sell them directly to your franchisees or arrange a deal with the manufacturer to get a profit cut.
Other sources of income could be add-on fees for advertising your management system or technology.
Develop your franchise system
Successful franchises mean you are successful as a franchisor. Just because you have a successful business does not mean that your brand will be successful as a franchise business. Following are some tips for developing a successful franchise:
If you do not provide a unique product or service in the market, your franchise will not be successful. You also need to create a good support structure for your franchisees; otherwise, they all fail. Some new franchisors get a lawyer to help them and develop their franchise, but they don’t know that there are so many other aspects of the business that they might also need. For instance, growing your business plan and arranging a training program or marketing a campaign strategy.
Many consultants recommend that you first have a couple of successful business franchise experience to make your business run successfully and smoothly. In this way, you know that there is a market for your product and it’s enough for more than one store. It would help if you also did some market research to ensure that there is enough customer demand for competing locations. It is also good to research the chances that you become successful in other cities and even other countries. Before expand worldwide, make sure your business can work in your country too.
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