Are franchise fees worth it?
"I have issues paying $60k franchisee fee, 6% royalty plus 4% advertising. How is it worth it?"
I get this question all the time:
Some franchises are your ticket to becoming a multi-millionaire and others aren't worth the money
I'm going to break down the 3 big franchise costs and give you a checklist to help you determine if the franchise is worth it
#1 Franchise Fee
The franchise fee is your ticket to enter the game. A one-time fee will get you a 10 to 20-year agreement.
These fees are set in stone in the franchise agreement and are usually non-negotiable. The fees can range from $35k to $75k with $50k being the average
Someone else has a proven business model that has been perfected for years. They've figured out how to acquire customers & employees, price for max profit, and deliver great service.
Every franchise has built a brand. Some brands like Midas, Dairy Queen, and Planet Fitness have very strong consumer recognition. There are many other brands you've never heard of but absolutely crush it.
When you buy into a franchise you instantly become part of an established brand that has a website & identity.
Each franchise will define a unit differently
For retail concepts you get the license to operate a single physical location. The location will be selected based on:
Co-Tenants (Whole Foods / Starbucks)
For mobile concepts, like home health, cleaning company, junk removal, painting, etc. you get a designated territory. The franchisor will create the territory based on their unique factors:
For home health care it's the number of seniors above 65 with a median income over $X
For residential cleaning, it could be a minimum number of owner-occupied, single-family homes, with a median income over $X
For many it's purely population: 100,000, 200,000, 300,000 etc.
For retail concepts, franchisors could provide a protected territory based on population or distance.
Many don't provide any territory protection. However, they usually aren't stupid enough to cannibalize their customers and piss off their franchisees by putting locations too close.
Franchisors do provide protection for mobile territories, meaning other franchisees can't operate or solicit business inside them.
Does the business have a "secret sauce"?
The secret sauce could be custom-built equipment, software, or process that runs the entire business. The secret sauce could be a combination of the brand, the leadership team and culture that creates a thriving franchise community.
Does the franchise have buying power that provides a discount on start-up costs?
Some franchisors negotiate great deals with vendors that could save you $10k, $20k, or $30k off the retail prices you'd pay as an independent.
You will pay a royalty of 4% to 8% of sales every month as long as you’re a franchisee. Here’s what should make it worth it:
The franchisee community is one of the most important under-the-radar aspects of owning a franchise. You instantly join a group of entrepreneurs all over the country who are building the same business. You'll join an email list, a WhatsApp chat, a Slack channel, a Facebook group, etc. to communicate.
Some franchisors organize "power groups" which are 10-15 franchisees who get together on a regular basis to share best practices & challenges. Setup your own group if the franchisor doesn't organize them.
95% of franchises are sold internally, franchisee to franchisee, and never fit the open market. Why?
An existing franchisee is already approved by the franchisor, understands the business model, and likely has instant synergies/cost savings. The other franchisee has a track record of being a solid operator, taking care of their employees, and providing great customer service. They may also be a friend.
Compare that to selling to an outsider who the franchisor has to approve based on liquidity, net worth, credit & background. Since they don't know your business they will question everything and put your business through the wringer.
Cost of Doing Business
Would you rather have:
A) 12% net on $25M business
B) 17% net on a $2M business
I'll pay a 5% royalty and take a lower margin on a much larger business all day. A royalty is a cost of doing business.
Every franchise requires different levels of spend on advertising. Every business, franchise or independent, has to spend money on marketing to drive business.
A franchise has significantly more buying power than you would on your own. They also have experts on staff to ensure they maximize the ROI.
Some franchisors charge a small amount, 1% to 2% for a brand fund. Franchisors have full control over this money to create brand awareness. This money could go towards updating the website, logos, & other creative materials.
Major brands, like Midas, require you to contribute to a national advertising fund. Franchisors have full discretion on how to spend this money. Most allocate the funds across multiple layers & channels:
Regional DMAs (Philly/Dallas/Miami, etc)
Search Engine Optimization
Smaller brands that don't need to advertise on a national level will require franchisees to spend a certain percentage of sales locally. It could be 1% to 6%. Marketing driven business may require a specific dollar amount ($20-30k) be spent during the year
Franchisees full control on how this is spent
Pay Per Click
Focus on Operations
Most people that buy into franchises are great at operations. They don't want to be distracted by marketing, branding, software, admin, and other non-operational issues.
Franchisors are the marketing experts responsible for 95% of the decisions. All you need to do is decide what promotions (price points, discounts, deals, etc.) you will offer.
Not For Everyone
Franchising is not for everyone. People who want complete control and micro-managers make terrible franchisees. Outside-the-box thinkers who want to constantly try new ideas will face friction with the franchisor
People who build a fortune through franchising love following a playbook. Show them how to make money and let them go execute.
Not all franchisors are the same. Some provide incredible value while others are bad investments. One of the best ways you can increase the odds of finding a great franchise is to work with an expert franchise consultant.
I'm building a franchise consulting business to help people find the best franchise based on their goals, budget, skills & location. Click here to book a discovery call with my team.
Every Friday on my podcast, Business with Beers, I feature an episode on franchising.