Franchisor Tips: Essential Guide for Setting Franchise Fees

You’ve decided you’d like to welcome investors into your business to help you reach new territories. But before you can create glossy adverts to tempt entrepreneurs towards your brand, you’ll need to establish your price. Here’s our guide on how to set franchise fees.

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When you give an investor the rights to operate under your brand, you’ll want to make sure you’re both getting value for money. The franchisee will be looking to make an adequate return on their investment, but the business is your project, after all, and you don’t want to undervalue it.

Setting franchise fees involves a fine balancing act you’ll need to get right if your franchise is to appeal to prospective franchisees and continue making a profit. Here’s how you can set your price when franchising your business.

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The initial / set-up fee

This first payment doesn’t go to you; it covers everything the investor has to do to get their business ready for launch day. You’ll need to give would-be entrepreneurs an idea of how much it’ll cost them to set up their business, refurbish the site, buy vehicles and equipment, and make sure everything’s in place.

This fee will vary depending on the type of business you run and its requirements. For instance, if your franchisees can manage their branch from home, the set-up cost will be relatively low.

Once you’ve calculated how much money it’ll take to get one franchise unit ready for launch, you can include an approximate or minimum set-up fee when you advertise your investment opportunity. This will give prospective investors an idea of the scale of the investment they’ll need to make.

Average set-up fee: £40,000 - but more affordable opportunities might cost just a couple of thousand pounds, and internationally-recognised brands can charge millions.

The franchise fee

Unlike the set-up fee, the franchise fee goes to you, the franchisor. When you first distribute operating rights to investors, you’ll be faced with the cost of developing all the required elements for your new franchise. You’ll finance the franchisee recruitment and selection process through the franchise fee.

By far the most costly and time-consuming part of this stage is creating the paperwork. You’ll need to seek professional advice about writing the franchise agreement, operating manuals, training programme resources, brochures and marketing material.

Did you know? Franchise fees usually come in at between £500 and £300,000, and form 5-10 percent of a franchisee’s total investment - but they can be as much as 50 percent.

It can be tempting to base your franchise fee on the prices other franchisors in your sector are charging or - more worryingly - just pluck a number out of thin air. But if you’re to maintain a positive track record and reputation, it’s important you spend time getting this figure right.

So, how do you set your franchise fee? You should think about how unique your offering is compared to other investment opportunities, as well as its potential profitability. Also, calculate how much it’ll cost you to provide key resources and carry out all the tasks you’ll need to complete as you take on franchisees.

You should view the franchise fee as a chance to recover some of the costs associated with recruiting and training franchisees, rather than a way to make a profit. You’ll reap the rewards of selecting the right franchisee further down the line from the revenue they’ll generate when they’re up and running.

Ongoing fees / Royalties

The ongoing fees, or royalties, are regular payments made by franchisees to cover the cost of your support and guidance. Usually, these ongoing costs are charged as a percentage of a franchisee’s total turnover, but they can also be a flat fee.

‘Percentage’ fees tend to be more appealing to franchisees, as they fluctuate according to how their business is performing. In other words, if the profitability of a franchise unit falls, the franchisee isn’t forced to keep up fixed fees and risk falling into debt.

Getting royalties right can be tricky. If they’re too expensive, franchisees will expect a higher level of support than you can offer and may end up disappointed. On the flip side, if you set the fee too low, you may not make enough profit to reinvest in the business. The key is to achieve a happy medium; aim to help your franchisees make a decent profit while providing the support they deserve.

Note: Some franchisors choose not to charge any royalties at all. Introducing this offer will help you attract franchisees, but you should only do so if your business can provide the necessary resources without charging ongoing fees.

Average royalty fee: 7-8 percent of total turnover

Marketing fees

Once your franchisees have set up businesses across a region, you’ll need to think about launching network-wide promotional campaigns. You may choose to charge your franchisees a small percentage of their turnover to cover your marketing costs.

One of the main reasons people choose to invest in a franchise is the benefits of being part of a bigger company with national, or even international, recognition. If you can offer this level of brand awareness, each franchisee should contribute to the marketing pot. This will help you continue running marketing campaigns.

Over time, the marketing fund will generate a substantial amount of money, so it’s worth involving your franchisees when it comes to deciding how you’ll spend it. By engaging your franchisees, you’ll have the chance to get a second perspective and some great ideas, as well as boost investor satisfaction levels.

Average marketing fee: 2-4 percent of total turnover

Renewal, resale and exiting fees

Franchise agreements don’t last forever. Your franchisees may decide to walk away when it ends, renew their contract or, occasionally, terminate it early. Other investors may decide to sell their franchise unit on to another would-be franchisee.

If an investor chooses to renew their agreement, sell their unit or leave before the end of the contract, they should pay a fee. This charge will either go towards your continued support, management of the hand-over process or compensation for the resources you’ve already dedicated as a result of their initial commitment. You should work out how much capital you’ll need to complete these tasks to a high standard.

All the fees you put in place should be clearly explained in the franchise agreement and all franchisees should be aware of them before they sign it.

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>> Read more:

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• Franchise Funding and Finance

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Find more information

Getting your franchise fees right is an important step as you start franchising your business. Hopefully, we’ve given you some helpful tips, but we also recommend you do your own research to make sure you’re charging franchisees a fair price for your business opportunity. Choosing the right fee level will not only help you attract investors and maintain their job satisfaction, but it’ll also give you the ability to generate a healthy profit.