What should your
franchise fee be?
franchise fee be?
Article on how to assign a balanced value to your franchise
Buying a franchise is not an easy task. The main difficulty for the buyer is that they do not fully understand what steps they will need to take. It is obvious that someone should help, someone should accompany the opening of a partner outlet. But newcomers to the franchise business definitely lack a specific understanding.
That's why I've put together a typical franchisee roadmap. I've collected the 25 main steps for a successful franchisee. This is the path you are most likely to follow if you decide to buy a franchise.
That's why I've put together a typical franchisee roadmap. I've collected the 25 main steps for a successful franchisee. This is the path you are most likely to follow if you decide to buy a franchise.
What is a lump sum payment
Before moving on to the methodology for determining the franchise fee, let's understand the concept itself. A franchise fee is one of the main payments in a franchise program, paid immediately after signing the Commercial Concession Agreement. It is a fee for the right to join a successful network, the right to use the main elements of the brand: trademark, logo, interior, etc., as well as technologies, standards, and recipes.
Since the franchise fee is the main payment and the entry fee for the franchise program, it is what is meant when they say "how much does a franchise cost?".
All franchises that exist in our country I subjectively divide into two groups by cost: franchises cheaper than a million and franchises more expensive than a million rubles. Through experience, I came to the conclusion that the process of selling, supporting, and negotiating changes precisely after the one million mark.
Since the franchise fee is the main payment and the entry fee for the franchise program, it is what is meant when they say "how much does a franchise cost?".
All franchises that exist in our country I subjectively divide into two groups by cost: franchises cheaper than a million and franchises more expensive than a million rubles. Through experience, I came to the conclusion that the process of selling, supporting, and negotiating changes precisely after the one million mark.
What should the lump sum payment be?
Covering costs is the task that the franchise fee solves. Developing a franchise, advertising it, and supporting it involves expenses. There are several sources of income for a franchisor, and the franchise fee is definitely one of them.
Generating profit is naturally the reason why the founder launches a restaurant franchise - they want to make a profit. This is a great desire, but the following task of the franchise should also be taken into account.
Not to harm the payback period - it is very easy, in the pursuit of profit, to inflate the franchise fee, which will be included in the capital investments for opening a restaurant under your franchise. Too high a franchise fee lengthens the payback period and adds risks to the enterprise under your brand.
Weeding out non-target investors is a very important task of the franchise fee. For example, you need investors with business experience and expertise in their region, who should develop a project with capital investments of 20 million rubles. In this case, the franchise fee simply cannot be less than 1 million. Conversely, if your franchise is geared towards students and young entrepreneurs, they will not appreciate your franchise for more than a million.
Generating profit is naturally the reason why the founder launches a restaurant franchise - they want to make a profit. This is a great desire, but the following task of the franchise should also be taken into account.
Not to harm the payback period - it is very easy, in the pursuit of profit, to inflate the franchise fee, which will be included in the capital investments for opening a restaurant under your franchise. Too high a franchise fee lengthens the payback period and adds risks to the enterprise under your brand.
Weeding out non-target investors is a very important task of the franchise fee. For example, you need investors with business experience and expertise in their region, who should develop a project with capital investments of 20 million rubles. In this case, the franchise fee simply cannot be less than 1 million. Conversely, if your franchise is geared towards students and young entrepreneurs, they will not appreciate your franchise for more than a million.
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How to determine the lump sum payment
Now that we have defined the tasks, let's move on to the most important thing, the main steps you need to take to determine the franchise fee for your franchise:
Step 1: Determine the cost of the transferred elements.
Under the commercial concession agreement, you transfer a set of elements: layouts, recipes, technologies, standards. Estimate their real value. For example, the average price for logo development is 50,000, development of technical maps costs 100,000, etc. It is logical that the franchise fee cannot be lower than the cost of the elements that you transfer once after signing the contract.
Step 2: Define the target audience of investors.
How much money should your investor have? How much should they spend on your project? What amount can they spend once for the right to work with you? It is extremely important to understand the portrait of your franchisee in order to determine their criteria and motives for buying a franchise.
Step 3: Study the competition.
Write down all the franchises of your format in a table, and in the next column indicate the cost of the franchise fee. The choice of strategy is up to you: "number one", "best price/quality ratio" or "everything is the same, only much cheaper".
Step 4: Choose the optimal ratio of franchise fee to investment.
I have come across franchises where the franchise fee was several times higher than all the investments in opening the facility itself, but this is usually an exception. I suggest choosing three options for the ratio of the franchise fee to the investment in opening: 1 / 0.5 / 0.1. The chosen ratio should be dictated by the demand for your brand, as well as the sales plan you set for your franchise.
Step 5: Adjust for the number of outlets in the network.
Naturally, investors are more willing to join a project that is already open in different regions and demonstrates high performance.
Step 1: Determine the cost of the transferred elements.
Under the commercial concession agreement, you transfer a set of elements: layouts, recipes, technologies, standards. Estimate their real value. For example, the average price for logo development is 50,000, development of technical maps costs 100,000, etc. It is logical that the franchise fee cannot be lower than the cost of the elements that you transfer once after signing the contract.
Step 2: Define the target audience of investors.
How much money should your investor have? How much should they spend on your project? What amount can they spend once for the right to work with you? It is extremely important to understand the portrait of your franchisee in order to determine their criteria and motives for buying a franchise.
Step 3: Study the competition.
Write down all the franchises of your format in a table, and in the next column indicate the cost of the franchise fee. The choice of strategy is up to you: "number one", "best price/quality ratio" or "everything is the same, only much cheaper".
Step 4: Choose the optimal ratio of franchise fee to investment.
I have come across franchises where the franchise fee was several times higher than all the investments in opening the facility itself, but this is usually an exception. I suggest choosing three options for the ratio of the franchise fee to the investment in opening: 1 / 0.5 / 0.1. The chosen ratio should be dictated by the demand for your brand, as well as the sales plan you set for your franchise.
Step 5: Adjust for the number of outlets in the network.
Naturally, investors are more willing to join a project that is already open in different regions and demonstrates high performance.
How much should your franchise cost? What franchise fee should you set for your franchise? Pricing questions are always of paramount importance. Mistakes can lead to uncertainty and confusion in the future. "Are they not buying because it's too expensive or because they don't like the product?". That's why you need to do everything right from the start.
Within our franchise development projects, we determine the optimal franchise fee that investors from your target audience are willing to pay. Advice and an outside perspective are very important here, since the founder tends to overestimate their costs and their contribution, while we give recommendations from the position of those who will be buying this franchise.
Within our franchise development projects, we determine the optimal franchise fee that investors from your target audience are willing to pay. Advice and an outside perspective are very important here, since the founder tends to overestimate their costs and their contribution, while we give recommendations from the position of those who will be buying this franchise.