If you are interested in franchising your business, you will probably be thinking, how do franchisors make money? As a small business owner looking to expand, this is a crucial thing you need to understand before expanding through franchising. In this article, we will list the multiple ways a franchisor can make money by recruiting a new franchisee.
Different ways the franchisor can make money:
The initial franchise fee
Depending on which franchise you decide to purchase, the initial franchise fee can be the most expensive averaging from £5,000 up to £300,000 or more, depending on which franchise you choose, making it the largest investment when joining a franchise. However, this will allow the franchisor to cover the renovation and basic startup costs that come with opening a new franchise location.
Ongoing royalty fees
When you open your franchise business as a franchisee, you will also be expected to pay royalty fees, allowing you to keep operating your franchise under the franchisors established and trusted brand name.
Royalty fees can either be a fixed amount you will need to pay as a franchisee or a percentage-based fee on the franchise businesses revenue.
While these fees may seem unfair, especially to new franchisees, they are vital to keep your franchise business operating. Remember, when you buy a franchise, you agree to follow a proven system. This is why franchises tend to have significantly higher success rates than independent businesses. Although royalty fees may seem unfair, buying a franchise saves you plenty of time and capital as long as you make sure you do your due diligence before signing any dotted lines.
Franchise renewal fees
As a new franchisee, you will have a contract on how long you can run your franchise business before you can renew your franchise contract. The average franchise contract is usually at least five years commitment expected by the franchisee, but this also depends heavily on which franchise you decide to invest in since some franchise contracts can be as long as ten years or even more. This is why it is crucial for a new franchisee to understand how your franchise agreement works before signing on.
Although most franchises tend to cover the training costs within the initial franchise fee, some may charge you for training fees that will teach you the day-to-day operations of how to run your
franchise and make it successful. This kind of support is invaluable, especially if you are a first-time franchisee or business owner.
Some franchisors may also handle all of your marketing needs as a new franchisee, but this also comes with a cost. So instead of you doing your own marketing, you will be using the marketing experience of the franchisor, but using a franchisors marketing resources for a fee is highly recommended and can be very rewarding as a new franchisee, especially if you are a first-time business owner since you need to understand the franchisor will have years of experience and success in marketing new franchisees franchise locations, so it’s best to follow the proven process even down to the marketing stage to achieve success as soon as possible.
The bottom line
We hope this article has helped you understand how franchisors can make money when franchising their businesses. If you want to learn more about how to franchise your business, we recommend you read our previous articles, such as our comprehensive step-by-step guide to franchising your small business. This should help you get started on your journey in franchising.