Franchising Operations. By Celyna Vang
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For the charges you pay, the franchisor licenses to you the usage of the name of the business and offers other support. Usually there is a business operating system in place, contracts for products or services offered, equipment packages, store design packages, etc. Many franchisors will also arrange for financing relationships. Some franchisors supply the product straight and make money on the sale of that product to you. Such an arrangement often reduces or eliminates the royalties you’d in any other case pay. Usually, you will pay an upfront license price and then pay ongoing royalties—often as a share of your sales, plus contribute to regional and/or national advertising funds. The franchisor will hopefully provide business expertise as well operations management, marketing, selecting places — and will provide coaching, usually at their corporate headquarters for one to two weeks, plus coaching and support as you plan and get your franchise unit ready to open.
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As a franchisee, you own the business, but you are subject to the guidelines of the franchise agreement — products, store decor, uniforms, where product is bought, certain advertising guidelines, etc. Franchising could also be a superb choice if you prefer a business with current brand recognition and defined processes you may follow, instead of creating the business from scratch on your own. The service and assistance offered by a franchisor varies from chain to chain, and may not always live up to your expectations. But the essence of the value of a franchise is the following:
Current brand value (unless the brand is new to the market)
Current operating system
Current product/service choice
Supplier relationships (typically with favorable terms)
Coaching
Proven places up and running based on the concept (unless the brand is new to the market)
Cooperative advertising and cross-traffic with other franchisees
These things, like all issues of value, must be earned. In the case of a franchise, along with all of the work you’ll have to do is to be successful in any business, you have to pay the franchisor for the right to make use of their techniques and trademarks. As noted above, this payment usually takes the form of an upfront “franchise license payment” and then a cost of ongoing royalties, plus a contribution to local and/or regional and national advertising funds. Upfront charges could be pretty nominal, like $5,000, or could be in the tens of thousands of dollars. Royalties (charged as a % of your income) vary by chain, but are often in the 5% - 8% range. Advertising contributions are also usually charged as a share of sales and might vary considerably, but usually vary from 1% to 5%, with 3% - 4% being the most common in my experience. Along with contributions to regional or national advertising funds, you’ll have to spend further local marketing dollars to be a success — don’t assume you’ll be able to depend on your share contributions to supply satisfactory marketing resources to make you a success.
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