There is a great deal of interest in franchises and fees these days. Fairness of franchise fees, (per cent of gross income receive) vary greatly. Client’s inquiries reflect a great deal of interest in franchises. Often, without much experience in running their own business, they realize a franchise may help them overcome that handicap. The answer to the question is not simple. The value is in direct relation to how much the franchise does to generate business for you.
Assessing Royalty Rate Fees
My experience as a Houston SCORE mentor in evaluating two different franchise opportunities might provide some insight to the due diligence required in assessing the franchise services. This is the tale of two different franchises with the same 8% royalty rate charge. I did due diligence on both companies. One is worth the royalty and one may not be.
My analysis began with a well-known fast food chain. How does the franchisee receive the value for the 8% royalty fee with a fast food chain? The name recognition is national. One and half percent of your royalty is used for local advertising. I would receive all operating and administrative procedures while attending a two-week school. This course works through several manuals which address all business fundamentals. This "cookie cutter" path fits some entrepreneurs. The franchise researches and provides the location using an analysis based on traffic counts, proximity of box stores, schools and malls. A contract with this franchise could make it easier to obtain a bank loan.
My next due diligence was a nationally recognized self-serve frozen yogurt company. They pledged to help me find a location. I found a self-serve store laid out nearly identical to the national frozen yogurt companies that I had seen. I investigated this prototype self-serve store that duplicated the plant of a franchise store. A negative is that I would not have the knowledge provided by the franchisor. Based on a projected million dollar sales revenue, there would be a $80,000.00 investment in land and building.
Is a national food chain franchise worth an 8% royalty? It probably is. Is an 8% royalty paid out for a self-serve frozen yogurt franchise a good investment, probably not. You may be able to duplicate the operation and save a lot of money. There is no one right answer for everyone. It needs your due diligence.