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Funding the franchise business - franchisee

Written by: Diarmuid Kieran

Article Overview: How the franchisee funds his franchise business

Funding the franchise business - franchisee

The franchisee should budget for the following cost items:
a) The initial franchise fee
This fee will depend on the structure of the franchise package. In its simplest form, the initial fee includes services to assist with start-up, initial training and the purchase of the franchisor's "goodwill" along with the right to use the brand name. In more complex franchise arrangements the franchisor may acquire and fully equip the premises and, upon completion of the franchisee's training, hand over the "key" to the franchisee. This is called a turnkey operation and the initial fee is based on the cost of the elements included in the package, including training, plus a mark-up for the franchisor.
b) Capital investment
The franchisee must also fund the fit-out of the business in accordance with the specifications of the franchise package. For the job franchise this may entail little more than the purchase or lease of a van or truck and some small items of equipment. In some of the large retail franchises, however, the securing and refurbishment of premises and fit-out can represent a sizeable cost for the franchisee.
c) Working capital
A franchise business is no different from any other in that the franchisee will have to fund the initial start-up expenses until revenue from customers builds up. The franchisee will, however, benefit from the learning experience of the franchisor and the other franchisees, and will thus have a more accurate picture of working capital requirements. In addition, the recognised brand name of many franchise systems often results in faster customer acceptance of the product or service in question.
d) Continuing fees
The management services fee (MSF) charged to franchisees by the franchisor provides the latter with his or her income. (A franchisor must always remember that these fees are based on turnover, not profit).
A franchisor may also require a franchisee to make a contribution to a marketing or advertising levy which funds the cost of national marketing and advertising for the network.

Any prospective franchisee should carefully assess all of the above costs and on-going fees when evaluating a franchise to ensure that he or she will receive an adequate financial return from the franchise system in question.

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Related Forum Posts
Re: Franchising Brokers vs Franchising Consultants - Franchise consultants are free and work with you without any obligation. they do not work for any one franchise but do get a percentage of the franchise fee when a franchisee that was registered with the franchise came from the consultant and the franchisee signs. They will try to match up your interests and skills to franchise businesses that are right for you. They can explain franchise guidelines and help you in any way they can. Franchise brokers usually get paid by the client and/ or franchise (generally get some type of commission). Additionally, they can get points or referral fee off the deal if they refer you to a lending resource too after they sell you on a franchise. Typcally they will try to sell a prospective franchisee on a larger deal so they get a larger commission.
Franchisers approach for Negotiations - One thing to consider when preparing for negotiations with a franchiser is that some items are required to be disclosed in the UFOC, the franchise fee, for example. If you want the franchiser to reduce the franchise fee by $10,000 so you can afford the franchise, the franchiser will be obligated to disclose that his franchise fee is $X, except for the franchisee in Virginia who only paid $X-$10,000. Franchisers will never agree to such a modification for one franchisee because all future potential franchisees will know about it and ask for the same reduction. A reasonable approach is necessary to negotiating with a franchiser
Setting Fees - Determing what to charge for the franchise fee, royalty and advertising contributions requires a clear understanding of the margins involved in your business, the goals of your business, and the benefits attributed to the franchise. In order for franchising to be successful, there must be a mutually beneficial relationship for all parties involved: franchisor, franchisee, vendors, and the consumer. Keep in mind your risk/reward and that of the franchisee.
Re: 50 States - All Franchisees of the U.S. Government - [quote="RussellWebb":1twrc65u]Is this common knowledge in the franchise arena?[/quote:1twrc65u] This is not common knowledge in the franchise industry. I don't even see it this way. I don't think it's a franchisee/franchisor relationship at all. By definition, a franchise is the agreement between 2 legally independent parties which gives: - a person the right to market a product/service using the trademark or tradename of another business (franchisor) - the franchisee the right to market a product/servuce using the operating methids of the franchisor - the franchisee the obligation to pay the franchisor fees for these rights - the franchisor the obligation to provide rights and support to franchisees. The first 2 points don't apply to the federal/state relationship. The last 2 do.
Each Franchise is different! - No two franchises are alike. Build the fee structure that makes most sense for all parties involved, franchisor, franchisee, and vendors. Yes vendors, some franchises take the the % that vendors (for example coke and pepsi) give them and contribute those to the advertising fund. Many franchises don't manage the advertising fund by themselves but seek franchisees to have a say in how the money is spent, some times thru regional franchisee groups. Speak to a few of the franchise development companies (franchise mills) be careful for the fill in the blank, one size fits all franchise development companies, those companies seldom produce successful franchise systems.


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