What Do Franchisees Typically Have To Pay To The Franchisor | SkillsAndTech

Franchising is a unique business model that offers aspiring entrepreneurs the chance to own their own businesses while leveraging an established brand and system. But have you ever wondered how franchisors make Money?

After all, franchisors don’t just sell products or services like most other businesses. Instead, they earn income from multiple sources, such as royalties, franchise fees, and more.

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In this article, we’ll explain how franchisors generate revenue so you can understand why it’s become one of the most popular ways for entrepreneurs to start their own businesses. Read on to learn all about the different ways franchisors make Money.

The Franchising Business Model: At A Glance

Before diving into how franchisors make Money, it’s important to understand the business model. Franchising is a system in which a company (known as the franchisor) grants permission to another company or individual (the franchisee) to market its goods, services, and brand name within an agreed-upon geographic area.

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The franchisee pays the franchisor either a one-time fee or ongoing royalty payments in exchange for the right to use the business’s brand, processes, and systems. In addition, the franchisee also has to abide by certain rules and regulations set forth by the franchisor.

Some examples of successful franchising businesses include McDonald’s, 7-Eleven, and Subway. These companies have grown to become some of the biggest and most recognizable brands in the world thanks to their successful franchising models.

How Do Franchisors Make Money?

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Now that we understand the basics of franchising, it’s time to explore how franchisors make Money from this business model.

Franchisors earn income in two main ways: either directly through their franchisees or indirectly through their end users. Let’s take a closer look at each of these methods.

Directly Making Money

The direct income earned by franchisors typically comes from royalties, franchise fees, and other revenue streams associated with the sale of franchises.

Initial Franchise Fees

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The most common form of income for franchisors is the initial franchise fee, which is a one-time fee paid by the franchisee when they sign a franchise agreement. The amount of this fee can vary from franchise to franchise and is usually based on the size of the business and its expected success.

Typically, an initial franchise fee will cover things like start-up costs, training, licensing fees, marketing materials, and more. It can range from several thousand dollars all the way up to hundreds of thousands or even millions in some cases. On average, however, an initial franchise fee will be somewhere between $25,000 and $50,000.

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The Money collected from these fees helps to offset the costs associated with launching a new business and gives franchisors a return on their investment in setting up the franchise system. In addition to covering start-up costs for individual franchises, it supports ongoing growth and development initiatives like advertising campaigns that benefit all franchises within a brand’s network.

Some franchisors may choose to accept payments for their initial franchise fees in installments, allowing franchisees to spread the cost out over time.

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Royalties

Royalties are another form of revenue franchisors receive directly from franchisees. This is usually a percentage of the revenue generated by each franchisee and is collected on a regular basis (usually weekly or monthly). The exact amount varies widely depending on the individual franchise agreement but typically ranges from 4% to 12% of gross sales per franchisee.

For example, a franchisor might require 5% total royalties, which would be split between 3% in monthly payments and 2% in additional annual payments. That said, some franchisors have been known to negotiate lower rates for their most successful franchisees who bring in higher profits.

The Money collected from royalties helps to cover the cost of running the overall system – such as research and development, advertising material creation, staff salaries, etc. It also allows franchisors to make improvements to their systems over time and offers them an incentive to come up with new ideas that can help make their franchises more profitable.

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Moreover, royalties offer a steady stream of income that can help balance out fluctuations in other parts of the business model.

For instance, if a particular franchise isn’t doing well or if there’s an industry-wide downturn that decreases demand for certain products or services offered by franchises within a brand’s network, collecting regular royalty fees from all its other successful franchises can offset these losses.

Renewing Fees

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When franchisees want to renew their agreement with the franchisor, the franchisor can make money by charging a renewal fee. Someone has to foot the bill for the many expenses incurred throughout the life of the agreement, like administrative costs and maintaining quality standards.

In most cases, franchisors will also require their franchisees to update any old or outdated materials they are using in order to keep up with current trends or standards within the industry. Renewal fees go a long way toward covering these expenses.

It is imperative that franchisors get the renewal fee right, as they can often be a major source of income for them. The amount should not be too low or too high to deter potential franchisees from signing on with the brand, but rather just enough to cover necessary costs while also providing value to both parties.

Sublet Rent Upcharges

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Sublet rent upcharges are another way franchisors directly make money from their franchisees. In this type of agreement, the franchisor charges a franchisee for using a sublet space within an existing franchise location, usually in order to add additional services or products.

The amount of money charged varies based on factors like the size and location of the space as well as what’s offered in that space. On average, however, sublet rent upcharges can range anywhere from $500 to $2500 per month, depending on the terms of the agreement between the franchisee and the franchisor.

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In addition to collecting this fee, franchisors may also require their franchisees to pay for any additional costs associated with setting up shop in the sublet space.

For example, franchisees might be required to cover costs related to obtaining certifications or licenses required by local laws, purchasing necessary equipment or materials, and/or paying for any improvements needed in order to meet the franchisor’s standards.

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Training Fees

Training fees are another way franchisors directly make Money from their franchisees. Most of the time, training fees are included as part of the upfront franchise fee. However, some franchisors may choose to charge separately for these services.

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Training fees cover the cost of educating and preparing franchisees on how to run their business in a way that meets the brand’s standards. This includes providing instruction on the company’s mission and values, teaching them about operations, marketing strategies, customer service practices, and more.

The amount charged for training can vary depending on the complexity of the training program and other factors, such as travel expenses for trainers or staff members who need to be present for the course.

Indirectly Making Money

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As mentioned earlier, franchisors don’t just make money directly from franchisees. They can also benefit indirectly through a variety of sources. 

Supplies And Equipment

A franchisor can dictate which suppliers franchisees should use in order to ensure quality. Using this strategy can help you acquire collective buying power because it gives the franchisor the ability to negotiate significant discounts when purchasing items in bulk for the whole franchise network.

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Additionally, the franchisees will be able to raise their overall profit margin because the savings can be distributed to them. As a result, the franchisor will be able to increase royalties and entice new investors to open franchise locations for the company.

This indirectly benefits the franchisor by allowing them to increase their market share and, ultimately, their overall profits.

Marketing

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Franchisors can help their franchisees become more successful by investing in marketing efforts at the national or even international level. These campaigns can increase brand awareness for the franchisor’s firm. Once more, this results in increased profit margins as well as an increase in the amount of money going toward royalties.

For example, a franchisor might use its marketing budget to create ads or campaigns that target potential customers in the area. Or, they could roll out promotions such as discounts, loyalty programs, or other incentives to increase sales.

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These efforts benefit the franchisor by improving the overall reputation of its brand and making it more attractive to prospective investors.

Intellectual Property And Branding Materials

A franchisor can also leverage its intellectual property and branding materials to make Money indirectly. This includes any logos, artwork, or other creative assets that are associated with the franchisor’s company.

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Franchisees can be required to pay for the license to use these materials as well as royalty fees when using them in their own advertising and marketing campaigns. The franchisor will also benefit from increased brand recognition and customer loyalty as a result of these efforts.

Conclusion

Franchisors can make money directly from franchise fees, royalties, and training fees. However, there are also indirect ways for them to benefit, such as through their intellectual property and branding materials, supplies, equipment, or marketing efforts.

By carefully managing the franchising system, a franchisor can maximize the potential of their business and ensure the success of their franchisees. In turn, this will help them become more profitable and increase the value of their brand.