On Franchise Royalties

Franchise royalties are regular payments made by franchisees to a franchisor for the right to continue using the franchise company’s copyrighted materials and ideas. It is important to note that franchise royalties, which are calculated as a percentage, are distinct from the franchise fee. The franchise fee is a flat fee which is paid at the beginning of the franchise relationship when the franchisor and franchisee have signed the franchise agreement. The one time franchise fee is, not surprisingly, large in amount. Franchise royalties are much more manageable, but because they are paid on a regular basis, they could add up to more over the length of the franchise relationship, which could last for decades.

 

Setting the Rates for your Franchise Royalties

 

As you already know, franchise royalties are the source of income for franchisors in a franchise relationship. Thus it is important for franchisors to use care in determining what rates to set for their franchisees. If, in the process of laying the groundwork for your own franchise company, you set your franchise royalty rate too low, then that is the amount you will earn for the length of the franchise relationship. The only way you can change the royalty rates is to convince your franchisees to accept a renegotiation of the franchising terms. But how likely is it that franchisees would agree to renegotiate the terms of an agreement that is advantageous to them? Why would they agree to an increase in their franchise royalties unless you were offering them something additional (which would undoubtedly cost you some money) to sweeten the pot? Thus, the best time to do research on franchise royalties and to decide what levels to set them at is long before you ever sit down to sign agreements with your franchisees.

There are different models for charging royalties. One of them is to ask your franchisees for a percentage of their net sales. The other is to ask them for a percentage of their gross sales. Those who go for the former model tend to set the royalties at a higher percentage because net sales are, by definition, lower than gross sales. In both cases, it is evident that, the more that the franchisee sales, the higher the royalties that he or she will pay you. Hence, it is in your best interests to create conditions conducive to your franchisees’ success. These could include advertizing efforts to market your products or services and specific franchise locations. They could also include efforts to optimize territorial boundaries so that the individual franchises are exploiting their markets to the best possible effect, but not competing with each other.

Franchise Package

A quick internet search will reveal the term “franchise package” to be used in a variety of ways by different business entities. Some use it to refer to the documents initially given to those who are interested in learning about a particular franchise company’s franchising opportunities and applying to them. These may include a description of the franchising opportunity, a list of the factors determining the eligibility of potential franchisees, a form to indicate interest and apply to become a franchisee, and a form authorizing the franchisor to do a background check on the applicant.

 

Further examination of the term “franchise package”

 

Others may use the term to refer to the documents made available to those who are successful in applying to be franchisees. They include the franchise agreement and any other documents determining the terms of the franchise and governing the relationship between the franchisor and franchisee. These documents include a franchise operations manual, which informs franchisees about all dimensions of operating their franchises.  They also include a franchise disclosure document, which discloses to franchisees the rights to which they have access under the franchise agreement, and their obligations towards the franchise company. A franchise package can also include deposit agreements, multiunit agreements, financial statements, account assumption agreements and software license agreements.

The term “franchise package” is also used by some to refer to what one gets upon signing the franchise agreement and paying the franchise fee. This could include equipment relevant to running the franchise, training, and access to certain products and services. For instance, an ice-cream kiosk franchise package could include a business plan, a marketing plan, an operation guide, exclusive rights to a protected territory, storage cabinets, a machine for storing and dispensing ice cream, storage space and dispensers for various toppings, brand marketing, signs, menus, workstations, etc.

Whichever understanding of the term “franchise package” you encounter, you will find that it describes a franchisor’s overtures towards franchisees and potential franchisees. Thus, the franchise package gives applicants and franchisees alike insight into the franchise company’s degree of professionalism and its level of organization. A comprehensive package, incorporating all the necessary information clearly indicates that the franchise company is thorough and worthy of further consideration. It may also reveal that the company has been in the franchising business for long and has had the time to iron out the irregularities in its process. The better put together a package is, the more confidence that applicants and franchisees are likely to have in the franchise company. Thus, putting a package together should be seen as an opportunity to engage in implicit PR for the franchise company.

Franchise Expansion

Deciding whether to franchise your business in the first place is distinct from franchise expansion. The former entails a variety of steps to determine whether your business would succeed as a franchise business. It could end with you rejecting the idea of franchising and opting, instead, for smaller, more controlled growth. The latter involves a business that has already proven successful as a franchise business. Expanding this franchise business by opening more franchises in previously unexploited territories, regions, and even countries will make it possible to maximize the franchise company’s profits.

Sometimes franchise expansion is something that is considered as a long-term goal, right at the beginning of the franchising process. The franchise company typically starts small, expanding locally, and translating the franchise formula into success close to ‘home’ before considering larger conquests nationally and internationally. In this case, franchise expansion occurs in phases. This is a wonderful way to expand because, by the time the franchise company opens its doors to international franchisees or to franchisees in previously ‘unconquered’ regions of the country, it has established that it has potential for great success. This, more than anything, helps to win over potential franchisees who are shopping around for a franchise company to approach.

 

Some of the Complications of Franchise Expansion

 

Franchise expansion on an international scale brings into play issues that a franchisor probably has not had to deal with previously. One of these is the issue of the franchising laws in the country into which the franchise is expanding. Some countries simply do not have laws regulating franchising. Alternatively, they may have such laws, but they could be underdeveloped in comparison to the franchising laws that exist in the franchise company’s home country. The problem with venturing into new markets where franchising is not legally regulated is that legal issues might arise, putting the franchisor or franchisee in a position of great disadvantage. If this happens, then there is no legal basis for resolving these issues. Either party could incur great losses as a result. Franchisors are also likely to want to protect their trademarks and to feel concerned about their limited capacity to do so in countries that have poor franchising laws or don’t have any to speak of.

There are various models for franchise expansion. A particularly intriguing one involves partnering with a franchise business that already has infrastructure in the region or state into which you want to expand. This can be a mutually beneficial relationship, allowing each franchise company to benefit from the other’s infrastructure. It dramatically reduces expenses. However, it can create extra legal complications if it isn’t well-thought through and if the associated contracts are not drawn up well.

Franchise Basics

Franchising your business is not easy. Even with a checklist of franchise basics to keep you on track, it is a long, drawn-out process. It also involves a lot of research, preparatory work and requires tremendous courage and resources to make radical changes to the business that you have already poured your heart and soul into. However, if you do it right, the effort will eventually pay off. Once the franchise system is well-established and your franchisees are raking in revenues, you will be able to enjoy relative financial security. Furthermore, you will be able to take pride in hearing the name of your business on the lips of hundreds upon thousands of new customers regionally or nationwide.

 

Defining Franchise Basics

 

To get to a situation where you can lay back and bask in your franchise success, you must ensure that you persevere through all the necessary work and that you accomplish it well. Everything you decide at the beginning of the franchising process will have implications for the rest of your career as a franchisor. Thus, you must get certain decisions right at the beginning. Some of these decisions are pretty obvious, even to somebody who is not a specialist in franchising. Thus, it makes sense to call them franchise basics.

Perhaps the most important of franchise basics is making sure that you do your franchising ‘homework’ then review it multiple times as necessary. You must tread extra-carefully, making sure to research everything, and to countercheck the solutions you are given. Seek a variety of informed opinions about issues that you are not 100% certain about before agreeing to anything legally binding.

Another basic step in the franchising process is to make sure that you come across as a credible franchisor. The franchise package that you give your potential franchisees must contain every single relevant document. You should have thought out all the likely eventualities, and even the unlikely ones in the drafting of your contract and other documents. This includes making sure you have an exit plan. If a particular franchisee proves to be a terrible match for your franchise company, you should have the option of letting go of him or her through a set of legal steps that you have both previously agreed to. Another important point on the list of franchise basics involves coming up with a suitable brand for your franchise, and subsequently protecting it from being exploited by others.

Market Your Franchise

One of the greater challenges in franchising, and ultimately the one which will decide whether a franchise will succeed or not, is the question of how to market your franchise company. If you do this the right way, then you will have no shortage of potential franchisees applying for the opportunity to purchase franchising rights from you.

It is important to realize that many franchise companies have gone bust simply because they were not able to develop a large pool of franchisees. They failed to sell their respective concepts to their target audience. If you do not want to end up in a similar situation, then you must take the initiative to market your franchise effectively. Make sure that you are promoting it to people who are likely to be interested in it, and who will actually make the effort to invest their resources in it.

 

How Can You Market Your Franchise Effectively?

 

How will you identify the ideal audience for your marketing efforts? Well, it certainly won’t hurt to engage in some preliminary research. Find out who is likely to want to buy a franchise unit by talking to the franchisees of your competitors or of franchise companies similar to your own. The idea is to find out from them what exactly convinced them to buy franchising rights from particular franchise companies rather than others.  What features did they find attractive in the proposed franchising deals?

One of the things that you are likely to find out in your research efforts is that, for every franchise company that has been successful in gaining franchisees, there is a feature that makes it stand out when it is compared to similar franchising companies. The product offered might be unique. Alternatively, it may be the services offered which stand out. Ultimately, the franchise company has to have a unique selling proposition. If you have one of these, then you will fare better in your attempts to market your franchise.

Another critical part of effective marketing entails paying attention to such details as your franchise trademarks and to the terms you offer your franchisees. Your franchise trademark should be simple, distinct, and easy to tie back to whatever it is that your franchise company does. This will make it easier to remember and will, consequently, facilitate your efforts to market your franchise to a sympathetic audience. As for the terms that you offer your franchisees, it should be obvious that, the more favorable these are, the more likely they are to want to read your franchise disclosure document and to eventually buy franchising rights.