Franchising is one way of many by which a business can expand. The key ingredient that a business must have that wants to consider expansion through franchising is something that someone would want to license from it to use in the operation of an independently owned business. Specifically, that something is a system for operating a particular successful business associated with a particular brand name trademark.

Franchisors often operate corporate stores which they own and which replicate to various degrees the original business.

The profitability model for these stores is usually equivalent to the financial modeling applicable to the original business. For the franchisees of one of these businesses, its profitability model is similar.

However, its ability to control aspects of its revenues and expenses is impacted by the system within which it operates. Those impacts are in the form of the financial costs controlled by the franchisor.

How Do Franchisors Make Money? - MBB Management

Each franchisor will pick and choose which silos best suit its system and its financial goals. These choices will fundamentally affect the attractiveness of its system to potential franchisees. Often, these costs are directly linked to the primary silos as discussed below. Franchise Fee Initial Most franchisors charge an initial fee. Franchise fees range in size. Against this fee, the franchisor must consider that it will incur expenses in granting a franchise which can include such things as brokerage fees and the cost of compliance with the applicable statutory disclosure regime.

Franchisees typically bear the cost in the form of a training fee. Franchisors may add a profit component to the training fee.

The royalty or fee is reflective of the underlying licensing arrangement. Franchisees usually pay these amounts without regard to their own profitability. They become a cost of operating like any other unavoidable fixed or variable expense.

Advertising Fund Franchisors typically maintain a fund to which franchisees contribute to permit the establishment and operation of advertising campaigns locally, regionally and nationally for the benefit of the system as a whole.

Franchisees may be required to contribute a percentage of their gross sales, again without regard to their own profitability.

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Franchisors can charge for these services on something other than a pure cost recovery basis if they choose to. They then sublet the premises to the franchisees. Franchisors with excellent covenants might be able to negotiate lower rents than could their forex managed account reviews franchisees.

Some franchisors, how franchisors make money permitted by their leases, upcharge the rent paid by the subletting franchisees. Supplies and Equipment Franchisees typically use a variety forex money management book supplies and equipment mandated by the franchisor.

Franchisors mandate this use for purposes of quality control and consistency of customer experience.

The hidden ways franchisors make money off franchisees – Franchise Pundit

They also do so in order to take advantage of collective buyer power. The benefit of this buyer power may stock for benelli supernova may not be shared with franchisees.

Franchisors might upsell the products to their franchisees directly or indirectly. They can also seek rebates from the system suppliers which, again, they may choose to keep for themselves or share with their franchisees. They may negotiate for marketing dollars to be paid by product and service suppliers including for application to the costs of system conventions. They might create private label programs where they supply their goods for use to the system at prices they determine.

Most franchisors oblige their franchisees to only procure supplies from approved suppliers enabling these arrangements.

Transfer and Renewal Fees Franchisors often charge franchisees fees if they wish to transfer their agreements or renew them. Sometimes their administrative and legal costs are added to the fees introducing a profit element to the franchisor. They may have affiliated businesses responsible for build outs or renovations. They may contract out the work and walt disney stock market symbol an upcharge to the franchisee responsible for paying for the work.

The hidden ways franchisors make money off franchisees – Franchise Pundit

These charges can cover hard costs such as the salaries of those franchisor employees managing this construction. As such, the build out or renovation of a store can yield profits for a franchisor directly and indirectly. Franchisors can choose to charge for these events on something other than a costs recovery basis and thereby be another source of profit for them.

This creates another potential profit silo. Compliance Systems Franchisors are regularly engaged in the monitoring of franchisee performance. These processes, including staff visits, secret shopper programs, audits and compliance software programs, are an expense to the franchisor. Franchisors can seek to pass on the expense or other charges relating to the activity. Again, these charges may or may not include a profit component.

The items paid for may or may not bring off-setting improvements to revenues that a franchisee could expect to earn if it operated outside of the system. Importantly, franchisees generally have little say on when or whether to incur these costs. They should make their decision to buy into a franchise having fully analyzed the potential impact of these charges weighed against the anticipated benefits of being in the system. These costs can impact the viability of franchises and their attractiveness in the marketplace.

Franchisors must balance these competing and interdependent considerations when devising and developing their systems and establishing these charges for maximum system efficiency.

Their agreements with their franchisees must also permit them to have maximum flexibility to alter the charges they impose as market changes affecting the business occur. At Sotos LLP, we help emerging and established franchisors understand these options, design systems to apply them and draft agreements and disclosure documents to reflect their expectations and best practices.

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