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Lots of variables impact the initial Franchise Fee charged by a franchise fee. Some franchise organizations make the mistake of setting their franchise fee based solely on what their competitors are charging. Despite the fact that this might seem to be a sound approach, the issue is that not all franchise systems are produced equal, regardless of regardless of whether they operate within the similar business.

When establishing the initial Franchise Fee, it can be vital to bear in mind that despite the fact that the Franchise Fee can certainly aid a company's cash flow and help in sustaining the company's initial growth, the royalty fee earnings and revenue from the sale of goods and/or services to Franchisees should really be the important supply of income with regards to the long-term profitability from the franchise operation. Companies that attempt to make a massive profit from the initial Franchise Fee may well uncover that they're discouraging qualified candidates from seeking past the large fee.

When assisting clients in franchising their business, portion with the improvement method entails our determining an appropriate Franchise Fee (as well as other fees) that balance the franchisor's economic needs together with the wants with the franchisee relative to their total initial investment. We do this by evaluating numerous different elements.

With Franchise Fees wildly fluctuating even among comparable kind franchise firms, to a potential franchisee the Franchise Fee may possibly appear to become based on a "throw it out there and see if it sticks" approach. Even so, when the Franchise Fee is properly established according to a thorough evaluation of distinct aspects, it may be simply justified (and understood) by a possible franchisee.

When determining the initial Franchise Fee, we evaluate the following:

1. The sophistication and/or uniqueness of the program; 2. The prospective ROI and profitability in the Franchise Organization; and three. The Franchisor's fees and expenses associated using the acquisition and grant of the franchise.

When taking into consideration differences within the initial Franchise Fee of two related franchise companies operating in an established business (i.e. pizza), the third category is exactly where a lot with the difference among franchise costs can often be found.

Thefranchise feecosts and expenses may possibly involve:

* Allocation for franchise improvement costs * Allocation for franchise advertising and promoting expenditures * Franchise acquisition fees including sales expenses (i.e. sales commissions) and other associated expenditures (i.e. marketing materials, personnel) * Expenditures associated to instruction new franchisees and providing on-site support and/or internet site selection assistance prior to or in the course of the franchisee's grand opening period. Franchisors may possibly choose to involve some or all of these costs inside the initial Franchise Fee. * Other hard expenses incurred by the Franchisor in establishing a new Franchisee (i.e. instruction materials, supplies, gear) if these fees are inclusive of the Franchise Fee.

As stated previously, the initial Franchisee Fee could also be based in portion on the prospective ROI and profitability of the Franchise Business. Not surprisingly, this may well only be shared with a prospective franchisee by Franchisors who've made the needed disclosure in the Disclosure Document relative to "financial performance representation." Otherwise, these elements will only be tangible to potential Franchisees as soon as you will find quite a few franchises operating below the franchise technique.

For franchisors who don't make financial efficiency representations (along with the majority usually do not), the company's franchisees may decide to share their financial performance with prospective franchisees. So because the number of franchises increases, it becomes much easier to get a potential franchisee to evaluate the economic potential from the franchise. This is why it is actually frequent to determine Franchisors improve their Franchise Fee more than time. As the quantity of franchises increases, the franchise business gains a lot more credibility (and believability) for prospective franchisees. In essence, later stage franchisees are investing in far more of a "sure issue," which can justify a greater Franchise Fee.

So the question remains, what percentage in the Franchise Fee does a Franchisor commonly "net?"

Once more, this will vary tremendously in substantial element depending on the elements discussed. Also, some franchise organizations decide to "break even" on the Franchise Fee to minimize a franchisee's barrier to entry when it comes to the total initial investment. Other individuals franchisors may well actually decide to "lose" cash on the Franchise Fee with all the justification that they will make it up a lot of instances more than using the ongoing royalty fee generated by franchisees.

This getting said, it isn't unusual for a Franchiser to "net" 25% or far more in the total Franchise Fee (officially "gross profit"). It is also essential to don't forget that a portion of the Franchise Fee commonly incorporates a recoup of specific costs that the Franchiser previously incurred (i.e. franchise development expenses, production of marketing and advertising supplies, marketing costs, and so on.). So the net money flow generated from the Franchise Fee is normally greater than the gross profit. Consequently, the gross profit generated from the Franchise Fee increases as additional franchises are granted and some of those expenses are totally recouped.

There is certainly an art and science to establishing the initial Franchise Fee as well as other fees connected together with the franchise (i.e. continuing royalty fee and advertising charges, which I talk about in yet another report). When establishing the Franchise Fee, franchisers really should cautiously evaluate the several variables discussed in this article as they relate to their franchise. Performing so will help assure that the initial Franchise Fee is fair to each the franchiser and franchisee rather of a purpose to question the Franchiser's true motives.

Steve Vandegrift is President of FranSource International, Inc., a full-service franchise improvement and consulting firm founded in 1997. FranSource operates with both startup and current franchise feeproviding the expertise needed to begin and retain productive franchise operations.