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How Should the Franchisor Make Money?

This question is the topic of much debate, and with good reason.

Mark Rose

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As point of departure, we need to remember that franchising is a business tool developed by entrepreneurs for entrepreneurs. To be sustainable in the long term, the concept must offer franchisors and their franchisees realistic opportunities to make more money than they would make if left to their own devices. Over the past five decades, franchising has proven sufficiently robust to make this possible, provided that this is approached correctly.

  • Sources of income for the franchisor

It is customary for franchisors to charge an upfront fee or initial fee and ongoing fees.

  • Upfront fee

In terms of good franchise practice, the upfront fee should help the franchisor to recover over time the costs incurred in setting up the franchise. It should also pay for the expense of training the new franchisee and helping him/her to set up the business. Lastly, the upfront fee compensates the franchisor to some extent for the development of the brand and intellectual property associated with the franchise.

Upfront fee amounts range from R25 000 to R150 000 and more. This depends on the complexity of the business because it is influenced by training costs. The standing of the brand comes into play as well. When projecting capital requirements, prospective franchisees need to remember that in addition to paying the upfront fee, they need to raise funding for the establishment of the business and working capital.

  • Management services fee

The management services fee (MSF) pays for the right of access to the franchisor’s intellectual property and ongoing franchisee support; it also allows the franchisor to make a profit. MSF levels range from 1-8%, depending on the industry sector, and fees are usually payable monthly in arrears.

Some people refer to the MSF as royalty but this is misleading. While royalty income is a passive income, payment of the MSF entitles the franchisee to receive extensive ongoing support in all aspects of successful operation of the business.

Seen from the franchisee’s viewpoint, it is preferable for the MSF to be calculated as a percentage of the franchisee’s sales. Indeed, this is a key element of successful franchising because it links the franchisor’s income to franchisees’ business success.

  • Other fees

Some franchisors levy fees for providing additional services, for example a centralised administration service. Others charge a renewal fee when the franchise agreement comes up for renewal but this is less common in South Africa than in some overseas countries, notably the U.S.

In our view, such practices are acceptable only if they are disclosed during initial negotiations and franchisees derive a clear benefit. Our sentiment is supported by the CPA which provides that all franchise fees must be fully disclosed upfront and must constitute reasonable value for money.

  • The vexed question of confidential rebates

It is common practice among suppliers to offer franchisors financial incentives linked to network-wide purchases. This is acceptable provided that it is administered correctly. According to the CPA, franchisors are under an obligation to disclose confidential rebates received and how they intend to apply them. The Competition Act comes into play as well. It prohibits franchisors from compelling franchisees to deal with prescribed suppliers unless they can show that this is absolutely necessary to protect the brand or delivers other benefits.

Although the law is silent on this aspect, we’d consider it good franchise practice for franchisors to either share confidential rebates with their franchisees or allocate payments received to mutually agreed projects.

  • Advertising fees

Although most networks levy an advertising fee, we left this topic for last because the resulting payments are not income in the hands of the franchisor. It may be convenient to make advertising fees payable together with the MSF but in terms of the CPA, franchisors are legally obliged to keep advertising monies in a separate account. The resulting fund must be used solely for the purpose of brand and product promotions that benefit the entire network. Moreover, the franchisor must periodically account to franchisees for monies spent and supply them with audited financial statements.

In the next article, we will examine what constitutes a fair and balanced franchise agreement. To find out more about franchising and especially franchise finance in the meantime, contact the Business Manager at the Nedbank Area Office nearest to you. For contact details visit www.nedbank.co.za or your nearest Nedbank branch.

Written by Mark Rose of Nedbank and Eric Parker of Franchising Plus.
Copyright rests with the authors.

Mark Rose is the Head of New Business Development at Nedbank Business Banking. He holds a Masters in Business Administration (MBA) from the Oxford Brooks University, as well as various business qualifications from the Gordon Institute of Business Science (GIBS), the University of Stellenbosch Graduate School of Business, and the University of South Africa Graduate School of Business. Nedbank’s New Business Development unit develops customised industry specialised offerings to the medium sized business market, including Franchising, Agriculture, Professional – including Financial and Legal Practices, and the Medical Fraternity. This unit has also developed a unique Enterprise Development proposition. For specialist advice and more information on the Nedbank Franchising proposition visit the website or send an email to franchising@nedbank.co.za

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Franchisors

Osteostrong: An Exploding Global Movement Of Positive Change

A Kyle Zagrodzky Article by Dirk Coetsee.

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Kyle Zagrodzkys’ sincere passion for what he does made me smile in recognition of traits that I am always searching for in a leader, which is a love for people that is drastically enhanced by the positive multiplication factor of having the heart of a servant.

The climate of the interview was one of tangible enthusiasm as the author witnessed a serial entrepreneur at the cusp of global expansion, share his thoughts on his company with refreshing transparency.

The CEO and founder of OsteoStrong speaks with a sense of awe, visible in his eyes, of his business relationship with Tony Robbins and his mission to change lives through this innovative franchise system.

Yes, you read correctly, the iconic performance coach and entrepreneur Tony Robbins who authored Awaken the Giant Within and recently Money Master the Game: 7 Simple steps to financial freedom, is a very enthusiastic and committed advocate for OsteoStrong and Kyles’ business partner. Sincerely and truthfully sharing the same value system is often the rock on which sustainable, successful and world-famous business partnerships are built.

Related: Start A Service Franchise: Cash In On These 3 Successful Models

The franchise system OsteoStrong, is the collateral beauty emanating from Kyles’ most highly regarded value of giving to others and is set to become a global phenomenon within the next couple of years.

OsteoStrongs’ patent-pending robotic technology is based upon the research of Dr. John Jaquish, PhD who’s journey in life sciences started when his mother told him that she was diagnosed with osteoporosis. He invented a device that’s purpose is to trigger the effects of high impact loading without the risk of injury. The result of a once-weekly treatment utilising this device is over 14% gains in bone density in both the spine and hip over a just 6 months!

The reader, at first glance might have the same impression as the authors initial paradigm of this systems’ value offering, that is simply put, that OsteoStrong is the most effective cure purely for those at an advanced age with the focus of combatting or preventing osteoporosis.

The above assertion is however a dramatic deviation from the whole truth. Although this system is proving itself to be the most advanced and effective cure for osteoporosis, any athlete engaged in any discipline and of any age can receive a vast range of performance enhancing benefits from this innovative system.

When you increase your skeletal strength, it dramatically impacts your total strength output. As an example, during a four-year case study that engaged 500 subjects, the average strength gains were increased by a whopping 290%. These results were achieved through a total of 1 session per week at seven minutes per session.

osteostrong

The author was amazed to learn from Kyle first-hand that the awe-inspiring and very typical results are achieved with virtually no effort on the clients’ part. Your total commitment as a client is to go to a facility once a week for seven minutes, engage in four extremely safe “trigger events” (high impact loading) dressed as you are to receive a plethora of benefits over time.

Related: 7 Laws Of Great Pricing

It is common for clients to see a rapid and vast improvement in speed, agility, and balance. Clients also in general report that general niggles such as shoulder, lower back and knee pain disappear. A compound effect of the combination of all the benefits mentioned is a much-improved general sense of wellbeing.

OsteoStrong does not compete with anyone in the gym or wellness industry. Instead, its highly unique value proposition compliments the offering of all businesses related to fitness and health.

This cutting-edge innovation is a franchise system, a business, yet more importantly it is exploding as a global movement of positive change. Commitments for the development of over seven hundred and fifty franchises have been signed and the franchise management team is working overtime to keep up with the amount of franchise enquiries. They do keep up though, as their commitment to positively affect as many lives as they can, is unshakeable.

As the author was about to end the interview with Kyle he recognised a certain peaceful look on this business leaders’ face that can only be derived from a sense of knowing that he is changing lives and making a difference through sincere giving. We are all heartily invited to take part in this movement of positive change that is OsteoStrong, and for the sake of our own general wellbeing we should not turn down the invitation.

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Franchisors

What Franchise Model Is Right For You?

Learn what factors determine which franchise model is right for your business.

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Franchise Model

Many years ago, the most common franchise was the traditional brick-and-mortar location such as fast food restaurants and storefronts. Modern technology has brought a variety of business models to the marketplace that offer several different models to choose from.

Related: What Is The Future Of The Franchise Model?

Home-based businesses

Home based businesses are very popular these days since technology has made it possible to perform many business activities remotely. These businesses include accounting and professional services, consulting, digital and other marketing services and a variety of other models.

These franchise models offer owners many benefits including lower operating overhead costs, fast and easy startup and the convenience of working from home. Consider the following when evaluating a home based franchise business:

  1. Are you a good time manager? Working from home allows you to live and work in the same place, which is great for some but a nightmare for others. Many have a hard time concentrating on work with the distractions of home such as children, pets, spouse or even TV or home projects. On the other hand, many struggle with stopping the work to enjoy family time.
  2. You should give yourself specific starting and ending times to create a regular work schedule.
  3. Have a door with a lock. You will need to have a private and professional workspace. Additionally, it is equally important for you to be able to shut the office door at the end of the day and focus on home life.

Related: 5 Strategies For Franchise Leadership Development

Mobile businesses

Mobile businesses

Some business owners prefer to work out in the field as opposed to being tied to an office or storefront. Mobile businesses can be flexible and offer lower startup costs. These businesses include food trucks, home and business repair and maintenance services, pet grooming and other creative service models. Here are a few things to consider:

  1. Make sure that your franchisor offers a strong marketing programme. Mobile businesses do not have the benefit of walk-in traffic so they must generate all of their business with outbound marketing efforts.
  2. Use technology to maximise your efficiency. Time is money as they say, especially when you have to factor in travel time between paying jobs. On demand scheduling apps, mobile point of sale systems and communication tools can add to your bottom line when implemented properly.
  3. Check your homeowners association (HOA) rules if you plan to park a commercial vehicle outside of your garage. Many HOAs do not allow any vehicles, including trailers, with logos or wraps to be parked in plain view.

Brick-and-mortar businesses

Brick-and-mortar locations include the standard restaurants, retail, hotel, storefront and offices. This model offers the potential benefit of walk-in traffic which may be a better fit for someone who is more comfortable having customers come to them as opposed to business models that require outbound marketing or sales. This model generally requires more planning and related expense due to the build-out and construction of the site before opening. Before you decide to open a brick-and-mortar franchise, you will want to keep the following items in mind:

  1. Location, location and location are said to be the three most important factors in the success of a brick-and-mortar business. Proper due diligence is mission critical to ensure the best location. The franchisor may offer site selection assistance or refer you to qualified service providers that can help you find the best options.
  2. Use a qualified commercial real estate broker. You should interview a few brokers to make sure that you find one that you feel will best serve your needs. You may find a broker that has experience in your specific business category, which can be an added benefit.
  3. Read Brick and Mortar Franchise Success by Carolyn Miller. Miller is the founder of the National Franchise Institute, which offers classes and education for location-based franchise operators. This book offers a wealth of money and time saving tips and trick that are a must for anyone opening a brick and mortar franchise.

Most franchise owners report that their business lifestyle was a determining factor in their choice of a business model. Consider the “day in the life” of each franchise model to see how they match up with your ideal business before you choose. You should be able to visit existing franchises or participate in a discovery day visit to get a good feel for how each model operates.

This article was originally posted here on Entrepreneur.com.

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Franchisors

Get Into Your Franchisees’ Good Books: 4 Ways To Communicate Better

Build a better relationship with your franchisees to avoid conflict and strengthen your brand.

Diana Albertyn

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Your franchisees weren’t chosen on the basis of a friendship criteria, so it isn’t surprising that you may not get along with all of them. If they were just tenants in your building, that would be fine – but as partners in your business, your relationship with them should constantly be worked on, especially by you.

“Ultimately, the best relationships – whether personal or commercial – are typified by mutual respect and trust,” notes Sally J’Arlette-Joy, founder and CEO of Sandwich Baron. “Communication is key to keeping all parties informed about changes, potential issues and success factors.”

How well are you communicating with your franchisees? Do you know what their pain points are? Are you open to their ideas for the business?

Here’s a guide to building and maintaining mutually beneficial relationships between your franchise and its network:

1Create and maintain multiple communication channels

Leverage the power and convenience of technology to interact with your team when you’re unavailable in person. Not only is everyone aware of any changes or developments, it’s a simpler way to communicate with everyone at once, getting the message across quicker and in more ways.

Related: Communication: The Glue That Holds Business Together

“To be effective, however, the communication needs to be more than frequent,” advises

“It needs to be honest. Get caught in a single half-truth, and trust is destroyed.”

Emails, WhatsApp groups and productivity apps are great ways to communicate in-between monthly or more frequent visits.

2Hone in on honesty

Transparency is a key factor and requires you to trust your franchisees to run an honest operation. They should also be able to know you trust them, allowing them to return the favour.

“If, for example, an operation uses mystery shopping to uncover violations of standards and under-reporting of revenues, franchisees should know about it,” says franchise consultant Mark Siebert. “Hiding this from franchisees will foster distrust and conflict.”

Trust isn’t easily repaired, so emphasise its importance to your franchisees and practice what you preach – always be open and approachable, no matter the situation.

3Keep an open mind for opportunities

mcdonalds-filet-o-fish

Most menu innovations, like the McDonald’s Filet-o-Fish – invented in 1962 by Lou Groen, a McDonald’s franchisee – don’t come from head office, but the guys running the network on the ground. They’re a result of a franchisee being unafraid to raise their hand, presenting a new idea, and being listened to by the franchisor.

“If a franchisor is willing to listen, and through meaningful dialogue between both parties, they may discover new ways to help the franchisee grow the business or exit the franchise as painlessly as possible,” says Monisha Prem, corporate advisor at M. Prem Inc.

Related: The Changing Face Of Business Communications

Strong relationships with your franchisees dictate their respect for the leadership of the franchise. Not sure how to go about strengthening your partnership as soon as today? Start by ensuring you’re aware how franchisees feel and how you can change or improve upon that.

4Steps to a successful partnership

Before you message all your franchisees for a coffee catch-up, remember that the quality of communication often trumps the quantity.

Keep the communication lines open by applying the guidelines below:

  • Whenever possible, take calls from franchisees rather than letting them go to voicemail; and always respond to messages on the same business day
  • If possible, establish a dedicated franchise support line
  • Every day, call at least one franchisee you haven’t spoken to in a while. Ask how they’re doing, how their family is, and what else your team could be doing to support their business.
  • Never speak negatively about franchisees to an employee in the company. Communications relating to franchisees should always be respectful.
  • Use a technology platform to track all communication with franchisees for staff members’ interaction with franchisees or should a dispute ever arise.
  • Appoint one person in the company as the communications manager, and have all system-wide communications filter through that, ensuring consistent tone and accuracy of information.

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