Fee Structuring

Franchising can be defined as a business relationship where one party allows the other to operate clones of a proven business system in return for initial and ongoing fees.

It is through these fees that the franchisor often derives the greater part or all of his income from the franchisees. It is important, therefore, that these fees are carefully structured during the process of developing the franchise concept.

The initial fee ought to reimburse the franchisor for all expenditure incurred in establishing each individual franchisee and also recover a proportion of the start-up costs of the franchise operation. Set at too high a level it will deter franchisees from signing up, set at too low a level the franchisor will fail to cover his own initial costs.

In order to attract franchisees the initial fee must be seen to be commensurate with the services provided and also appear competitive with the fees charged by similar operations.

It is through the ongoing Management Services Fees that most franchisors derive their ongoing income and profit. Once again these need to be set at a suitable level…too high and the franchisee will not make a sufficient return on their investment… too low and the franchisor will not be able to fund the level of support which the franchisees have a right to expect.

As with all business relationships the balance between the reward for both parties must be achieved.

This complex process of structuring the fee levels is a critical part of the financial modelling . Contact The Franchise Development Centre for more information.