The appeal of franchise ownership is strong. During the complicated start-up phase of establishing a franchise, when the franchisor plays a crucial role in the process and is very involved with the franchisee, the new owner may feel that he or she is definitely getting a good deal. The edge that it gives the first time business owner is often well worth the higher start-up costs and the contractual commitment – at least at first.
As time progresses and the owner becomes more confident in his or her ability to effectively manage the business and as the franchise becomes stable and well entrenched in the community, the ongoing cost of being a franchisee may seem less worthwhile. The role of the franchising organization may lessen, but the royalties due do not. However, once contractually committed to a franchising organization, extraction is not always a simple or inexpensive matter. Therefore, it is much better that anyone considering becoming a franchise owner understand the long term implications of entering into a franchising contract as well as having a clear idea of just what the ongoing costs are really paying for.
The Reality of Royalties
It is in the best interest of any franchisor to make sure that its franchisees are well equipped to successfully own and operate a franchise under the brand name. That being the case, many franchisors take a hands-on approach to establishing new franchises and offer a lot of direct interaction. Many franchisors will provide training and support, especially during the start-up stage and the first few crucial years.
All franchisors collect royalty fees from their franchisees. Though the percentage varies from company to company, ongoing royalty fees are something that every franchisee faces. During that initial period of heavy franchisor involvement, it can be easy to fall into the mindset that those royalty fees are paying for an ongoing level of similar support.
In many cases the franchisor will indeed continue to offer a high degree of support. However, if the franchise owner begins to view that support as something that is due him or her because of the royalties he or she pays, then that owner may become sorely disappointed.
The truth is, the ongoing royalty fees are simply compensation to the parent company for continuing use of its name and business model. Anything else provided by the franchisor will either be provided by contractual agreement or by fees assessed as other than those labeled as royalties.
Other Fees
To help minimize confusion on this matter, and to protect themselves, most franchisors itemize the fees that will be assessed. It behooves any potential owner to understand what fees their franchisor will collect prior to entering into an agreement. There may be additional ongoing fees to cover marketing, support and other facets of franchisor involvement.
It falls to the franchisee to decide if the fees assessed by the franchisor are reasonable. A wise investor will try to think 5 to 10 years into the future. If he or she can picture viewing those ongoing fees as more of a burden than the value they will provide, then he or she would do well to reconsider committing to that franchisor.