Franchise Article Author: The Franchise Guide
Franchises are responsible for over 40% of the business conducted in America today. 180 new franchises open everyday in this country and their survival rate is well over 90% after a full 10 years in business. There are approximately 750,000 franchised small businesses in the U.S., representing over 1,500 concepts in more than 80 industries.
Franchising allows entrepreneurs to tap into an existing and proven business model to increase their chances of success and to avoid the costly mistakes that virtually all new business owners will make. For an initial fee and some ongoing fees, franchisees are able to employ a team of professionals who have an established and researchable track record. These fees include:
Franchise Fee: This is the first fee that a candidate will pay to the franchise. This fee can range from a few thousand dollars to tens of thousands of dollars. Each franchise fee is different, but most are designed to cover the cost of training, trade name usage, and a defined territory. Despite popular belief, a reputable franchise usually does not make much money via their franchise fee.
Royalties: Franchisors, just like their franchisees, are in business to make money and do so largely through the collection of royalties. These fees can be levied as a percentage of gross sales, as a flat-monthly fee, or they can come in the form of profits from proprietary goods sold to the franchisee.
1. The most common approach is collecting the fee from franchisees as a percentage of gross sales. The more sales the franchisee generates, the more money the franchisor can collect from them each week, month, or quarter.
2. Flat-monthly fees can benefit successful franchisees by keeping their royalties fixed. The more business they generate, the smaller the less relevant the fixed flat fee becomes. Conversely, the franchise is still collecting the same fixed amount from franchisees who are not generating much in sales. This structure may not provide the franchise much incentive to help their franchisees increase sales.
3. Many franchises sell products to their franchisees at a mark up to collect royalties. Franchises who take this approach often require a minimum amount to be purchased each year.
Mandatory Advertising: The most natural (and incorrect) thing to do when sales are slow is to cut back on advertising. It takes an incredibly bold individual to look impending financial ruin in the face and say “let’s spend a few thousand bucks and try some advertising”. Franchisors know (often through their own mistakes) what it will take to make their franchisees successful and a large component of that success involves advertising. Most franchise systems have established marketing programs that they will require their franchisees to use. Some franchises will require franchisees to contribute to a national campaign while others will simply require proof that approved local advertising was implemented. Franchise critics often point to mandatory national advertising campaigns as being designed to benefit the franchisor, and not their franchisees in the field.
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