Advisory Nov, 03 2009

The worth of franchise fee

When an entrepreneur takes a franchise, the franchisor provides all the necessary assistance to the new franchisee to make his business run smoothly. But many a times the franchisees can be seen condemning the franchisors for taking high fees. Is it justi

By Abha Garyali
Sub Editor
The worth of franchise fee

Starting a business from scratch requires a lot of experience, contacts and exclusivity to make it different from its competitors. More over the new business takes time to be known. On the other hand a franchise is already a successful business with a brand name and popularity among the people. The franchisor is the driving force behind the success of the business which the franchisee aspires to buy.

Let us now have a look at the various ways in which the franchisor provides guidance to the franchisee:

  • The right to use the franchisor's system, including trade name, service marks, trade décor and operating system
  • Helps the franchisee to acquire and develop his location, including site specifications, sources of demographic information, site approval visits and architectural assistance
  • The franchisor guides the franchisee in buying equipments like fixtures, furnishings, signs, and a few other products required for the business
  • A copy of the franchisor's confidential operating manual.
  • Initial training for the franchisee, his manager and staff.

On behalf of providing all these supports, the franchisor demands an amount of investment other than the expenditure that costs the setting up of the store, from the franchisee which includes the franchise fees and some other recurring expenses from the franchisee.

Franchise fees: The amount paid to the franchisor to get the brand name recognition at the time of taking a franchise is the franchise fee. Franchise fee in most of the cases is a one-time payment. This fee can range widely from Rs five lakh to any extent depending upon the brand worth, type of industry etc. Franchisor assures the best publicity and advertising for the opening of the new franchised outlet by employing different techniques and by contacting public relations on behalf of the franchisee.

Royalties: The royalty is paid to the franchisor on a regular basis by the franchisee to use the business model, registered name, logo and services etc. This is the main source of income for the franchisor and the prime reason for the franchisor to franchise his business. It can be taken on a monthly or quarterly basis or once in a year. Some franchisors may fix the percentage on net sales. Royalties paid to the franchisor should not be considered as a strain by franchisees but the franchisor’s right for providing him with such a successful business. The fee is also intended to cover the on-going support that the franchisor provides to its franchisees.

Advertising fees: No matter how popular the brand is, but the requisite of advertising campaign is mandatory for a new outlet. This advertising fee is also incorporated in the fee charged for the marketing campaign that the franchisor launches on behalf of the entire franchise chain. The franchisor campaigns nationally for the brand awareness. The franchisee can also engage in local marketing to promote his business.

Many franchisors desire to maintain similar design standards across the country. The uniformity of the outlook of the store is done for the benefit of the franchisee. To conclude it can be said that the franchisor takes the franchise fee and royalties on account of sharing his goodwill and success with the aspiring franchisees. It surely is a good bargain!!

Related: Five fundas to succeed in vocational industry

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