Franchise fees are a necessary cost of doing business that benefit both the franchisee and franchisor.
Franchisees pay them in order to receive the start-up services franchisors provide. Although all franchises are different, typically most franchisors cover initial support and training, assistance for opening the franchise and grand opening help in the cost of the franchise fee. Assistance with site selection may also be included. There are expenditures for selling the franchise, too, which include costs for marketing, legal fees, commissions and other things that franchise fees help cover.
Franchisors benefit, too, as long as they provide effective support and training. A franchisee set up for success can have a positive impact on franchise development. Successful units boost brand awareness, drive revenue, generate profits and create happy franchisees, who can help you sell more franchises through validation.
But, the cost of doing business also increases over time, and as a franchisor, you may need to consider increasing your franchise fee. But, it should be done when the time is right and for the right reasons.
Raise the Fee for the Right Reasons
First, franchisors should never forget the initial franchise fee should not be considered a profit center. The fee is designated to cover the costs of the franchisor in securing and onboarding new franchisees. If these costs increase, the franchisor can consider increasing their initial fee to cover them.
Many emerging franchisors make the mistake of simply increasing the fee to cover broker costs or outsourced development costs in order to cover commissions. While this might be a necessity, it also increases the initial investment substantially and makes getting a return on that investment more challenging to their franchisee partner.
Initial start-up costs that are so high as to not provide a franchisee an adequate return on investment (ROI) will eventually come back to haunt the franchisor in terms of poor franchisee validation and lost franchise sales.
Additional Support, Inflation and Costs are Reasons to Raise
Increasing the initial franchise fee is something both emerging and mature brands may have to consider.
As emerging brands continue to grow, their level of service and support usually will grow and are continuously refined and improved. If this additional support has added costs, the emerging franchisor should certainly consider recouping those costs with a higher initial franchise fee.
Mature brands typically have their services and support developed and would not need to provide additional support. They may just need to increase the franchise fee due to inflation and increased costs to the franchise.
Consider Return on Investment Before Increasing Fees
You’ll need to make sure an increased initial franchise fee isn’t cost-prohibitive for potential franchisees. One way to do that is to research the initial franchise fees of your direct and indirect competitors and make sure your fee is within that range.
Also, take into consideration the average time it takes franchisees to break even and to see a ROI. If they are getting an annual cash-on-cash return of 25-30 percent and will recoup their initial investment in three to four years at a pretax level, then you are on the right course. Remember, the fees are there to create and support a model that provides the franchisee a healthy ROI.
Be Prepared to Explain the Increase
Providing justification for why the initial franchisee fee is increasing is warranted, along with explaining there will be an increased level of service and support franchisees will be receiving.
Normally, you would increase the fee upon the re-filing of your franchise disclosure document (FDD). So, it’s likely new franchisee candidates have not seen the old FDD and are unaware of the previous initial franchise fee. However, since it’s common practice for companies to post their initial franchise fee on their franchise development website, finding the increase does not require a lot of effort on the part of the potential franchisee. They might also have a copy of the old FDD, too.
Existing franchisees, who may add another unit, will certainly know the initial franchise fee has increased and will expect you to justify the increase.
Avoid the Early Increase
Because the first years of franchise development are crucial, you will want to avoid increasing the initial franchise fee early in your brand’s lifecycle. You could potentially scare off franchisee candidates. To avoid that, business owners should conduct thorough research to determine the appropriate amount to charge for the initial franchise fee before you begin franchising your concept. A good place to start is the websites and FDD's of competitors as well as a deep dive into the analytics of your own anticipated start-up support and on-boarding costs.
To learn more about increasing the initial franchise fee and other fees, turn to a trusted franchise advisor, Winmark Franchise Partners. With 30 years of franchising experience and more than 800 franchise owners representing over 1,250 locations for five brands, Winmark Franchise Partners can you help grow your brand through sound strategy and expert franchising advice. Contact us here or at (844) 452-4600.