How does a Franchisor calculate the Initial Franchise Fees?

For a Franchisor, Franchise Fee is a huge source of capital that suffices needs of capital and other crucial expenses of the business. A structured franchise fee is a product of a well analyzed process of determining the fee. For a new business which has just begun to franchise, the process might not be as complex, however as the number of franchises grow a franchisor dedicates paramount energy fixing the right franchise fee.

To Calculate The Same The Franchisor Takes Into Consideration Many Important Components

• Determining the cost of the rights

• Cost of initial training

• Cost to allocate support resources

• Initial marketing cost

• Profit margin• Procurement and

set up costs

There are factors that also influence the franchise fee, which franchisor has to consider before arriving at the franchise fee, such as:

• Franchise fees charged among existing franchises

• Other ongoing fees such as royalty fees, training fees

• Provision of finance aids

• Market value and competitor fees

• Policies of the country in relation to franchising

There is however theoretical approaches too, to fix up franchise fees.

a. Cost based approach

b. Investment based approach

c. Duration of franchise approach

It is however important for the franchisor not to be too prudent in setting franchise fees as it can make or break business. Therefore franchisors study the market over years and analyse the growth of business, profitability of each franchise for the franchisor as well as the franchisee and fix up a cost that is most acceptable. Hence determining the franchise fees is called both an art and science.

Simply put cost based approach accounts for all the expenses incurred in the process of initial set up of the franchise plus the profit margin.

Cost of granting franchise +

Cost of initial training +

Cost of support to set up +Profit margin =

Initial franchise fees

Cost of granting franchise +

Cost of initial training +

Cost of support to set up +Profit margin =

Initial franchise fees

This approach takes into consideration the total cost including all expenses to open a franchise including the expected profits and cost of continuous support till the end of said term; and then calculating the initial fees as a part percentage of the whole. Initial franchise fee in this approach could be 10 – 20% of the total cost.

Sometimes franchisor opts for the duration of franchise approach wherein, the initial franchise fee is calculated as a cumulative fee for each of the years.

a) Royalty Feesb) Training Feesc) Marketing Feesd) Advertising Feese) Procurement Feesf) Specific Services Fees

Apart from the initial franchise fees, franchisors also charge ongoing franchise fees such as:

Good relationship between franchisor and franchisee is possible only with clear cut transparency in all aspects of the business, especially the finances. Each fee charged by the franchisor is backed by a potent rationale. It is important however that franchisors share the same with the franchisee. This helps in building mutual trust. IIHT Technologies indeed believes in transparency and upholds culture built on trust with each of its partners. It believes that declaring the revenue system and being transparent about its financials ensures credibility and mutual trust. Not necessarily as a franchisee one could be happy about all the information he/she receives but he/she will definitely have access to knowing real picture and hence prevent disputes.

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Tel: 91 80 6160 4545 e-mail: [email protected] web: www.iihttechnologies.com/