Financial block
The franchisor needs to determine the structure and exact amount of fees that the franchisee must pay to the franchisor for the entire duration of his network. The franchisee must also be aware of the initial investment, fixed capital, the entry fee necessary to become a full-fledged franchise owner. Finally, the franchisor must be able to demonstrate the financial results that his network is projected to achieve when the key indicators of the current work of all participants in his network are achieved.
Usually, the entire financial unit includes the following three forms of payments:
- Initial contribution
- Current payments
- Contribution to a joint marketing fund (advertising fee / fee)
Initial fees for a leading foreign franchise range from an average of $10,000 to $30,000. However, depending on the reputation, stability or exclusivity of the operation, the down payment in some networks reaches $100,000 or more. However, current fees for the franchise are usually 3-6% of the sale value. The joint marketing fund ranges from 1-3% of sales revenue. It is worth noting that in some regions of Europe, all such fees can be included in business sales under the so-called distribution franchise. In a distribution franchise, commissions are included in the price of goods provided by the franchisor, which allows companies that may not have all the necessary capital to join the network and manage their franchising outlet, usually resulting in less controversy over the amount of remuneration owed to the franchisor.
Initial contribution
Attempting to calculate a down payment for a franchise is not always a strict financial equation, and the correctness of charging is usually influenced by the following factors:
- The nature and extent of support provided by the franchisor in the form of both initial maintenance and ongoing services
- Franchisees have funds for doing business
- Comparable Initial Contributions from Competitors – The Cost of the franchisor’s Trademark and Secret of Production
- The Attractiveness of Concept and Business
- The size of the territory in which the franchisee works.
- Franchise Agreement Terms
Theoretically, the down payment should cover the franchisor’s costs associated with creating a franchise package. However, in practice, the fee is not always sufficient to cover these costs in the early stages of the development of the franchise system. This is usually because franchisors are looking to develop and expand their brand. Part of the down payment franchisors can use to make their business concept more attractive to potential investors, until they realize that their brand and business concept occupy a strong market share for them. As interest and trust in a brand grows, franchisors are much less likely to reduce down payment; on average, franchisors who try to attract new franchisees quickly try to calculate an entry fee of 10%, a figure that can be below 10% in cases where the franchisee’s financial situation is limited.
Current payments
The current fee essentially covers trademark rights, know-how, and ongoing support services under the franchise agreement.This fee is usually calculated as a percentage of sales made by the franchisee. Since this is the franchisor’s main source of income, the fee should cover the fixed costs of maintaining and developing the franchise system, which ensures the success of both the franchisee and the franchisor in the market. Moreover, it goes without saying that the franchisor’s long-term goal is to generate additional and sustainable revenue stream. Therefore, it is very important to consider the full scope when the franchisor calculates the right fee, benefiting all parties involved.
Contribution to a joint marketing fund
One of the most important aspects of franchising is brand awareness: Beyond the product or service itself, the brand is designed and built through marketing and advertising efforts. When applied to the franchising system, it benefits all parties, so franchisees are expected to contribute to the public marketing fund of the business. In determining the amount of contributions to the marketing fund, the franchisor shall take into account the necessary costs necessary to conduct effective and effective advertising activities appropriate to the scale of its market, combining them with the costs associated with advertising materials.