Having decided that your business would make a viable franchise, the next step is deciding how to price your franchise package.
Your specific business context and detailed cost analysis will inform the process. We talk to some franchise industry experts, who reveal some of their top tips.
1. Be transparent with all costs
A potential franchisee will always ask how you arrived at your initial franchise-fee, so make sure you are prepared by formulating a comprehensive breakdown of your franchise set-up costs.
‘The franchise package should cover the costs involved in developing the brand and system and should cover the cost of training and marketing the launch of the franchisee.’ Nigel Toplis, The Bardon Group.
And Green Frog Consultancy's Sandra Venables stresses that these figures should be transparent: '… a franchisor should be able to say “£5,000 of that is us recouping advertising costs, there is £5,000 attached to the training of you for your two-week course to get you up and running, this is for the launch marketing, this is for stock, materials, equipment, uniforms – that sort of stuff.”’
Pip Wilkins, operational head for the BFA (British Franchise Association), believes this approach promotes an essential atmosphere of honesty, and emphasises: 'An ethical franchisor shouldn’t make money out of the initial franchise fee – it very much is there to cover the set-up for a franchisee.'
Alex Waite, Franchise Recruitment Director at Dream Doors kitchen refurbishment franchise echoes this sentiment,
‘Cover your costs. And that's it. At Dream Doors we don't make money out of the franchise package itself. It covers recruitment costs, training and deliverables. A franchisor should assess the real costs of recruiting and launching a new franchisee, and set a price to cover that.’
Norman Grossman, a PR Consultant, with 37 years in the franchise industry, agrees,
‘Cost all the elements in the package. This might include: initial and ongoing training and support, business reviews, tools, manuals, accounts software, software systems, a personal website, marketing and PR toolkit, personalised stationery and brochure pack.’
2. Foster a mutually beneficial relationship
For a franchise to launch successfully and meet the aspirations of franchisor and franchisee, both parties must be able to anticipate that their relationship will be fruitful.
Therefore, a delicate balance must be struck regarding the level of ongoing fees.
Grossman explains that this ‘…is not always easy with intangibles, like the cost of training.’
‘It is simpler to make value judgements in a service-based franchise, rather than a product or premises-based one. With ongoing service fees, some of the continuing costs of support can be covered and taken into account’
And Waite agrees that this aspect of costing a franchise can have a few grey areas:
‘The deliverables are quite simple to assess, as they don't really change in price. But recruitment costs can differ throughout a year, and certainly the level of support franchisees need varies considerably. Some new franchisees grasp our business very quickly, and don't need as much training. Others can need more support than we'd anticipated, and that cost is met by us.’
3. Consult the professionals
Aiming at a realistic valuation of their opportunity is vital for franchisors, and Wilkins advocates taking 'proper accredited advice' from industry professionals.
Franchise consultants will not only appraise, and advise on costings, but also candidly assess whether a business is indeed ripe for franchising.
Such experienced advisors must never be ignored,
'If the financial model simply doesn’t work, then it is best for everybody to know beforehand!' says Grossman.
4. Select a suitable profit-assessment model
Subject to the business context, franchisors usually adopt one of three methods for determining the level of annual profit a franchisee must deliver from the business proceeds: product mark-up; levy of a fixed fee; or a percentage of turnover.
Product mark-up, as Pip Wilkins notes, is the method most often favoured by manufacturing industries: 'If you manufacture tools and you then sell the tools to a franchisee for a mark-up, you make your money there.'
Though fixed-fee franchises are generally frowned upon – by virtue of the fact that fees are levied regardless of profits – this method is employed where circumstances demand a pre-emptive arrangement. Citing a common scenario, Wilkins comments that even though the BFA are 'wary' of fixed-fee franchises, '…cash-based businesses will be fixed fee because otherwise the franchisee can pocket lots of money as opposed to declaring it through the business.'
The 'percentage of turnover' model is the one most frequently encountered in the franchise world, and provides what most participants will consider fair arrangement: for an new business the pay-outs will be small, whilst established profitable businesses will surrender an agreed percentage of their returns.
5. Adapt and survive
Regardless of the profit-assessment model deployed, problems franchisor and franchisee may encounter later on can frequently be traced back to initially suitable profit-assessment agreements which subsequently become unstable.
Adjusting terms in the later stages of a franchise agreement may be the only way to sustain the arrangement on a long-term basis.
Norman Grossman is philosophical after years in the industry, and reveals that experience and awareness are key to successful valuations,
‘Determining the franchise fees is an art and science! In Japan, they say that the sales price of an item is decided first. Only then, does one looks backwards to see what it costs and make any adjustments.’