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Are you costing your support services properly?

Kate Groom

Prospective franchisees often ask, “What do I get in return for my ongoing royalty?” and “Is the royalty rate reasonable?”. Behind that is an expectation that franchise fees are linked to some sort of ongoing support. And it’s true that most franchisors provide support to their franchisees. But if you get the relationship between fees and support wrong you can send your franchisees or yourself broke.

What should you charge as a royalty fee?

Here are three questions to consider when you’re working out what to charge for ongoing royalty, and what level of support you’ll provide. 

Can the average franchisee afford the fees?

Loading up franchisees with costs can put them under financial pressure, especially if they operate low turnover businesses.

Here’s an example: Barry owns a tradie type mobile franchise. His turnover is $120,000 a year which is in line with the average for the network. The monthly fees are $1,500 in royalties and $300 in advertising fees. This comes to $21,600 per year. After allowing for his van finance payments, Barry has about $85,000 available to cover fuel, rego, insurance, accounting, office costs and repaying the upfront franchise fee which he funded from his savings.

It doesn’t leave him much to live on.

Are you trying to do too much?

In franchise land, there’s a fair amount of pressure to provide extensive franchise services … even if you are an emerging franchise with little money to fund elaborate support services. For instance, running your franchisees’ social media and PR, generating leads for franchisees, building custom software, and running fancy conferences. Then there’s the pressure to have a ‘back office’ team of accountants, lawyers and admin people, as well as a field support team. And that’s before the costs of your franchise recruitment. Before long you’re running at $500,000 a year in costs and accumulating losses.

Having all franchise support bells and whistles might sound good, but how are you going to pay for it? Perhaps your franchise started with an established multi-unit operation, so you have the back office in place. But if you have no existing business and few franchisees, you might want to think twice about adding services and staff you simply can’t afford (unless you charge franchisees a fee that they can’t possibly sustain!). 

Are you doing too little?

If you’re the founding franchisor, you might be an overhead the franchise can’t afford. This happens when the founder assumes figurehead status too soon. When the original pioneer is no longer working in the business but is drawing a healthy wage, the costs feed in to high upfront and ongoing fees for franchisees.

In start-ups, the entrepreneur usually works long hours for little financial reward. Early success depends on their expertise, hard work (and ability to live on little money). So the founder works in the business. In a franchise, that means juggling franchise recruitment, franchisee coaching and business improvement, as well as monitoring the numbers. The payoff for this effort comes later, and in the meantime the costs of the business are contained. 

However, it’s easy to look at the legends of franchising — who are now in a managing director role and supported by a team of managers — and think that your job should be managing rather than doing. 

But we’ve seen this add $100,000+ per year to costs when the business simply can’t afford it. As a result, franchise fees rise, franchisees become hard to recruit, and those on board can’t afford to pay their fees. It’s an ugly situation.

Setting franchise fees and royalty rates is more complex than picking the ‘average’ percentage, choosing a fixed fee that sounds reasonable or adding an extra fee here and there as you decide to add a new service that’s caught your attention.