how does the franchisor make money?

How does a franchise founder make money?
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When a founder creates a franchise, at the start he assumes and plans how he will make money. In addition to the prospects for regional development with the help of a partner network, the franchise must bring real income to the franchisor. In this article, we will figure out what the main sources of profit the franchising program provides to the founder, and we will determine the strategy for working with each of the sources.
Own retail outlets
Naturally, even in a brand's network that develops through franchising, there are company-owned outlets. In addition to serving as a testing ground for innovations and new technologies, company-owned outlets also generate profits. The profit from a company-owned outlet obviously exceeds the royalty volume of any partner outlet. For this reason, there is a temptation for the franchisor to pay slightly more attention and effort to their own outlet than to franchised ones. This path is fraught with significant danger, and it is necessary to take immediate steps to avoid it by dividing the processes related to franchising and the processes of their own outlets within the company. It is also desirable that the franchising and own network development teams be separate. Otherwise, employees will always prioritize their own outlets, which will harm the franchise and the brand as a whole.
Initial Franchise Fee (IFF): The payment made by the franchisee immediately after signing the franchise agreement. It can be considered the entry fee for joining the network. Naturally, this is a revenue stream for the franchisor, and they are interested in signing the largest number of agreements and attracting the largest volume of payments. The initial franchise fee also serves as a filter for partners. If the initial franchise fee is too high, you will cut off a large percentage of potential franchise partners. The initial franchise fee essentially compensates the franchisor for the costs of connecting a new partner, as well as serves as a payment for the objects transferred by the franchisor at the stage of launching a new partner.

Everyone who works with franchise sales knows the question: "What do I get for the initial franchise fee?" Answer this question at the stage of packaging and developing the franchise.
The monthly payment made by the franchisee for the use of the facilities, technologies, standards and brand of the franchise founder. When assigning royalties, the franchisor should not upset the balance of the normal return on investment of the project. The royalty also serves as compensation for the monthly support of the partner. The partner constantly compares the amount of royalties paid and the amount of support and support provided.
From experience, the issue of compliance with royalties and support arises most acutely after a year of a partner’s work in the network. A year is the usual planning horizon for an entrepreneur, based on the results of which he calculates the profitability of his business. Therefore, if the franchisor goes too far and sets too high a royalty, he must be prepared for the question: “we paid a million for the year, but what did we get in return?” And if this question arises, then most likely time has already been lost and the contradiction is in a very active and painful form. This problem can always be anticipated by providing the right support.
Markup on supplies of consumables
Traditional earning opportunities for franchisors often involve supplying ingredients and consumables specific to the franchisee's business operations. This can include items like patties for fast-food restaurants, cosmetic products for beauty salons, or tools for auto repair shops.

In many franchise agreements, there may be a list of recommended or mandatory suppliers from which franchisees are required to make their purchases.

In some cases, the franchisor itself acts as the supplier of consumables and ingredients. In such instances, the franchise is essentially designed as a distribution program with special partnership conditions.
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Equipment supplies
According to a scheme similar to the supply of ingredients, the franchisor can earn money by supplying equipment at the stage of opening a new partner facility. The markup is calculated in such a way as to maintain benefits for the franchisee. That is, the price at which a partner buys equipment must still remain below the market price, otherwise such a restriction runs counter to the commercial interests of the franchisee and can be considered direct deception.
Renting premises and equipment
In some franchising projects, the founder is the owner or tenant of the premises on the territory of which the future partner facility is opened. Theoretically, this could also become a source of profit for the franchisor. There are also cases of the founder leasing equipment to his partners. This practice is applicable mainly in low-cost franchises, where the share of equipment costs in the total investment is large. The franchisor goes so far as to provide equipment for rent, thereby significantly lowering the entry barrier for partners. The cost of equipment rental and equipment depreciation may be direct or included in the cost of supplied ingredients.
Credit and leasing for partners
The franchisor can provide credit to its partners or provide, for example, equipment on lease, lowering the entry threshold and simplifying the process of launching a new partner facility. Credit, with a stretch, can be called a source of profit.
Advertising and marketing fees
This is an absolutely dishonest but common way for the franchisor to make money. Typically, a federal company is run by the founder and compensated by the partner. A dishonest franchisor can inflate prices for advertising, which it purchases in bulk and at a reduced price (for example, from an advertising agency), thereby earning a monthly increase on top of other income items.
List of requirements for a business to become a franchise
These are the main sources of profit for the franchisor. As a rule, in order to protect the interests and not interfere with the speedy payback of the partner, 2-3 of the methods listed are used. However, in my practice I have come across examples when the founder’s company tried to make money on everything at once. This is rather an exception to the rule, because the franchisor usually tends to play the long game and build a network, rather than try to “cut it down quickly.”