Possible Revenue Streams When Franchising Your Business
Multiple revenue streams are a benefit to any franchise. Regardless of your particular industry, multiple revenue streams allow the parent franchising company to reduce risk and create a predictable cash flow from a variety of sources, rather than relying on a single set of products or services. Care must be taken when creating multiple revenue streams in order to not overwhelm franchisees and handicap their chances of success.
After all, their success only multiplies your company’s overall success. But certain fees and costs are traditional means of generating initial and ongoing revenue from each franchise. Below we will briefly explore some of the most common, with some other suggestions for additional consideration.
One of the most conventional fees for a franchising company to demand from a franchisee is the initial franchise purchase fee. This is typically a lump sum paid at the time the franchise agreement is signed. According to the U.S. Small Business Administration, the franchise fee is the “cost of entry” to owning any franchise. “Paying the upfront franchise fee unlocks the door to the franchisors’ proprietary business systems and more. You get the complete setup. The franchise fee is literally a license to own and operate the franchise business.”
In most franchise agreements, the franchising company grants exclusive rights to a franchisee for the local sale of the company’s services or products (or both) in return for royalty payments. These royalty fees are typically figured on a percentage of the gross sales revenue of the franchise on a monthly or quarterly basis. For example, if royalty fees are due monthly, the measurement period is usually a calendar month, with payment due for the month in question in the following month.
Royalty fees generally fall between 4-6%, though some can be as low as 1% or as high as 50%. This ongoing fee provides a means for the franchising company to cover the costs of ongoing services delivered to its franchisees and also provide the company with a profit from its operations.
Distribution fees are another way for a franchising company to cover their expenses if they provide products that franchisees sell. This fee is for any manufactured products the company provides to the franchisee. Most of the time, the manufactured products require the franchisee to prepare them before resale to customers. Also, in most cases, franchisees must buy a minimum amount of products from the parent company.
Site Assistance Fees
Sometimes called build-out fees, site assistance fees are paid by the franchisee to the parent company for help with finding and developing a key location. Many franchising companies offer some level of assistance in site location and development, though the final decision usually rests with the franchisee, subject to the parent company’s approval. Some franchising companies choose to cover these costs in the initial franchise fee.
Franchisee training is typically provided by the parent company and can range from a couple of hours of online training videos to months of on-site training. Many franchising companies provide free initial training for a limited amount of people per franchise (usually covered by the initial franchise fee), but most charge a fee for re-training or ongoing training.
New Products or Services
When exploring ways to create multiple revenue streams for your franchising company, you should also investigate creating new products or services for your franchisees to offer to customers. Of course, any new products or services should be of value to your franchise’s core customers and be simple and easy for franchisees to provide. New offerings can help distinguish your franchise from the competition, and even break into new markets.
Other ways for a franchising business to create streams of revenue from franchisees are:
Charging your franchisees a technology fee can allow you to provide propriety reporting, POS, and communication assistance; plus, websites, social media, and other brand awareness strategies that are based on technology. Paying one company to handle all these services for all your franchisees becomes very cost-effective when the technology fees of your franchisees cover the costs plus generate a small profit.
To earn a profit from rebates, the franchising company can negotiate with a product supply company to certify them as an approved supplier for all their franchisees in exchange for a certain percentage of sales paid back to the parent company. Under this type of system, the franchisee still ends up paying less than they would on their own, and the franchising company earns additional profits.
Many franchising companies provide necessary services for their franchisees, like staffing a call center for booking appointments or developing and managing an app that can be used at every franchise location to boost sales. Some parent companies provide these services under other fee arrangements, but some others use this as a separate revenue channel.
Few franchising companies offer direct financing to their franchisees. Handled in the correct manner, those that do can earn a significant profit. Financing can take many forms, like equipment leasing, loaning the necessary funding to actually run the franchise, or even financing a complete turn-key business.
Franchising is a steady and profitable means of growing your existing business. If you are interested in learning more, contact Franchise Guardian for more information.