FRANCHISE AND ROYALTY FEES IN THIS ECONOMY

So you are thinking of investing in a franchise and wondering what it is all about, is it worth it or should you go old school mom and pop.  Join me as I take this apart bite by bite to see the pros and the cons to help you decide which is right for you. 

7 REASONS WHY THE HELL YEAH!

Franchise Fees and Royalty fees are charged for good reasons. While the fees seem excessive, there is a value to them when we dig in deeper.

PROVEN SYSTEM: 

You are buying, a “proven” system that works and a business in a box. This also leads many people to fail when they think they don’t have to work the business and be there. They think it will just run itself. No business runs itself, the systems and processes with your ability to sell your mission and build a team that will go to war with you every day are how you win. 

 The Franchisor delivers training, guidance, and ongoing support as you continue to run your business.

So essentially, you are only paying for experience. Experience that puts you years ahead, devoid of many of the mistakes and painful learning curves that come with opening a new business. The founders of the brand and the early adopters of the franchise have paved the way for you. The theory is the franchisees gain from the struggles of the franchisor, and I have seen that to be a very effective tool.

 BETTER CHANCE OF SUCCESS:

Being a new business owner, or an entrepreneur, is difficult, and the chips are stacked against you from day “0”. So leverage the experience of the proven systems and brand.

 BUYING POWER

This is a very powerful tool! You really find out this when you have worked in regional versus national brands. I left a national brand and opened locations with a smaller regional brand and saw how buying power changes the playing field when you can leverage the supply chain. What a difference!

Discounts on products and services like shipping, telephone, internet, technology, and equipment are things you would never think of. More importantly, improved margins and lower costs improve profitability, allowing you to compete at a higher level. These relationships take significant time and energy to develop,

NETWORKING:

Most large brands have conferences that put you in touch with vendors and other franchisees. The learning and wealth of knowledge during these events can be priceless. 

Also, there are more “district” or regional small-scale meetings that help with brainstorming and sharing best practices. It’s good to know that sometimes you are not the only one having an issue and no one is as smart as everyone.

I would regularly participate, and it paid off in helping me be more successful. It’s more than the free lunch. My advice is to participate, don’t be the person who hides in the back of the room whispering. Your heartfelt comment could create engagement for someone else and vice versa. You could hear something someone else says and create a chain of action for yourself.

SUPPORT:

This one can seem like a double-edged sword. When you join a franchise, you become “part of the family”. You get training and support, share best practices, etc. with corporate people who have been in the business for some time and see the overall operation through the eyes of the other franchisees. 

But there is also accountability in the form of inspections. Remember you signed up with a brand, corporate has to protect the brand and the customer also, especially when it comes to food safety systems. So there is accountability to assure you keep your eye on the ball.

VALUATION:

Franchising has better returns that are worth more when you put a valuation on the business. Brands build equity over time, and that collective brand equity is shared with every franchisee, making your business more desirable than a Mom & Pop situation. This will benefit you in the instance you decide to get a loan or bring in an investor.

TIME TO SELL:

When you decide “it’s time to sell” the overall process will be much easier with a brand. 

For instance: I was part of a National Brand and when a sale happened it was a multiplier of sales. 

So if the multiplier is $1.10 for example, you would take $1.10 and times it by the sales. Sales of $1MM x $1.10 = $1.1MM. 

Not many businesses work that way when sold. Most businesses work off of EBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This means it’s the profit times a number usually 3,4,5 or 6 depending on the desirability and future earning potential of the business and there are several factors like lease term remodels, equipment needs, etc.

This doesn’t mean if you don’t have a franchise that it won’t sell when it’s time. You just have to find the right buyer as opposed to a Franchise where a sale will happen quickly, most times without anyone knowing until after it happens because it stays in the Franchisee network.

So now let’s look at the flip side of the coin…

10 REASONS WHY “HOW ABOUT NO”

Thinking a franchise? It’s not all cruise vacations and Cadillacs.

 START-UP COSTS:

Have you ever felt, “I can’t open a business because I don’t have enough upfront money”? Well before opening a Franchise, you will be required to put up non-refundable Initial Franchise Fees (IFF). For instance, Dunkin’ Donuts IFF Fee is around $120k, and Mcdonald’s IFF Fee starts at $45k and then goes up. You have to have a NET Worth of $500k to $1MM and many times $500k in liquid cash. If you are just starting out, it could take years to recoup these upfront costs. 

Oh yeah, you haven’t even started building the business yet!

UNCERTAIN PROFITABILITY:

You buy a “predictable” proven system when you buy a Franchise. However, it’s never guaranteed. The Franchisor by law has to give you what is called a Federal Disclosure Document (FDD) which goes over every detail about the Franchise. However, it’s filled many times with average information, average sales figures, and average expenditures. The numbers are a guide, but not definitive in the decision-making. 

Many times when you get the document and start to go through its 600 pages, you get overwhelmed and start to see floaters. I know I did. 

PROXIMITY:

Many times called “encroachment”. Imagine you spent your entire savings opening this new Franchise ANYTIME SUBS, then another fancy plaza is built right down the street and your Franchisor opens an ANYTIME SUBS there. Well, there goes your future business and possibly some of your current business. This happens all the time, every franchisor reserves the right to operate anywhere they want.

NO RECOURSE:

You have little to no recourse against the brand if you are wronged. All franchisors in their franchise agreements make you sign a legal “no recourse” agreement, waiving your right to sue them under federal and state law. What ‘s worse is that the (FTC) Federal Trade Commission is too bust and only investigates a handful of franchise-related cases each year.

ROYALTY FEES:

All Franchises have to pay a Royalty Fee, which is a percentage of sales that eats directly into your bottom line profit. Very quickly, you get the feeling of “WTF are you doing for these fees?”

INDEPENDENCE:

When you buy into a brand, you are not independent and lose your right to do much “outside of the box”. It has to be the same in Texas as it is in Maine regardless of location and such demographics. Things like, price, appearance, products, marketing, and design standards limit the way you’re able to operate. These standards do help with uniformity, but you quickly can feel like a robot. If you question it to a corporate representative, many times they will respond with, “You signed up for a Franchise”.

SUPPLY CHAIN:

Many times Franchises help and add massive value when it comes to buying power and negotiating supply chain things like food products, packaging, and services. But in many franchises will dictate who the supplier will be, saying that’s how they maintain quality control. The franchisor also receives kickbacks from the vendors which actually inflates the price of your goods, losing your competitive advantage.

ADVERTISING:

Many franchisees are obligated to contribute to the marketing fund, which is the monies used for all forms of print, media, TV, and digital marketing and advertising. But does all the money go where it’s intended? Ahhhh, I think NO! The Franchisor has the discretion to administer funds. Meineke Muffler Franchisees sued the Brand for improper use of Marketing funds and LOST, the court ruled the franchisor had NO fiduciary responsibility to report the use to its franchisees. Man, that was a kick in the pants. 

TERMINATION:

The slightest in-proprietary on your part, such as being late on royalty payments, or violating any of the brand standard operating procedures and especially violating food safety systems will terminate your franchise agreement. Many franchisors will give you time to cure any deficiencies, but it’s still scary that the rug and your entire investment could be pulled out from under you at any time. 

NON-COMPETE:

Let’s say you decide you’re done with the brand, and it’s time to move on, When you leave the brand all franchises have a non-compete clause that is usually within a certain mile radius of where your shops were. So by purchasing a franchise, you may limit your business opportunities for years after you leave the brand. 

Lots of options to weigh out when deciding on a new QSR or Retail line.  Do your homework and when in doubt talk to a consultant with REAL experience.  I help business owners see through the maze with a solution that fits them and their lifestyle.  Look me up and reach out. 

Chow for now.

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