Making Enough Money when You Franchise Your Business

If you franchise your business, it is extremely important for you to carefully consider all potential income streams. To successfully franchise your business, the new Franchisor company must be properly structured to earn enough money to fund its service programs for Franchisees, finance the next stage of growth and earn a reasonable profit.

There are a number of potential income streams to consider when you franchise your business. Virtually all Franchisors charge an initial franchise fee and an on-going service fee or royalty.

Additional sources of revenue when you franchise your business may include:

• Sales of products, equipment, services or other items to Franchisees prior to opening;
• Sales of products to Franchises on an an-going basis;
• Providing on-going services for a fee on an on-going basis;
• Possible financing programs;
• Area Development Agreements; and
• Revenues from site development/potential real estate deals.

When you franchise your business, typically, the initial franchise fee covers at least the costs of marketing for the individual franchise as well as the Franchisor’s costs for training the new Franchisee and any other pre-opening Franchisor responsibilities.

These responsibilities may include approving the proposed site and periodically visiting the franchise location to review its progress towards opening.

Determining the proper initial franchise fee when you franchise your business requires research, including the initial franchise fees charged by existing competitors, estimates of the Franchisor’s costs in selling and opening a new franchise location, the Franchisee’s initial investment and potential income, the size of the franchise territory, the number of franchises to be sold and other factors.

When you franchise your business, at the outset, the Franchisor’s principals can usually handle franchise sales, helping set up the new location and Franchisee training. Managers may provide some of the initial training, but as these are part-time additional responsibilities, any salaries are typically paid by the parent company. Therefore, when you first franchise your business, the Franchisor’s expenses are quite low.

For many franchised companies, the service fee or royalty is by far the most profitable reason to franchise your business. It is either a percentage of gross revenues or a flat weekly or monthly fee. The percentage royalty frequently ranges from 4 to 8% of the Franchisee’s gross revenues. The royalty may be higher, particularly in service businesses. When you franchise your business, the royalty must be sufficient to cover your costs of providing on-going services to your Franchisees plus a reasonable profit.

Depending upon the type of enterprise, when you franchise your business, you may be able to earn substantial profits from the sales of proprietary goods and services to Franchisees. For example, some restaurant franchises operate a company commissary. In some franchised service businesses, many of the services a Franchisee markets are actually fulfilled by the Franchisor – for a fee.

As you can see, the amount of money to be derived from you franchise program is a very important consideration when you franchise your business.