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Researching a Franchise

Making Sense of Franchise Fees

Buying a new franchise requires a considerable investment. Understanding the different fees involved can aid franchisees in making the right decision.

Chana Boucher

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After a long period of conducting research to find the franchise that suits your business needs and personality, it’s time to hand over a large sum of money. But how do you know if you are paying a fair price? And are you getting value for your money?

Franchisees need to take the operating costs into consideration when deciding whether or not to buy a franchise, but they should also look at what they are required to pay the franchisor upfront as well as on a monthly basis.

The upfront franchise fee

According to Anita du Toit, partner at Franchising Plus, with the Consumer Protection Act coming into being, a franchisor will be required to describe exactly how the upfront fee is allocated.

She says that in most cases a portion of it is a licence fee which allows franchisees to use the brand name and gives them access to the company’s intellectual property. Some of it covers the cost associated with start-up assistance, including project management or liaising with architects and builders. It can also be used for initial marketing support for the launch of the franchise, and the initial training.

Du Toit advises that franchisees ask what this training entails.

Bigger, established brands or franchises in lucrative areas charge higher fees and Du Toit says they have a right to do so, but should disclose the reason for charging the higher fees to the frachisee.

Vera Valasis, executive director of FASA, says franchisors have different views on the upfront fee. She explains that there are different models in that some charge an upfront fee, and some franchisors don’t charge an upfront fee or royalties but build commission into a product. She says the upfront fee is not related to goods in return as the amount depends on what brand you get into.

Claus Kuhl, managing director of Java Brands, says once a franchisee pays the upfront fee they are initially given a disclosure document. “Once they are approved as a franchisee they would receive a comprehensive induction session,” he adds. Kuhl explains that the upfront fees are determined by taking into consideration the costs associated with training, administration and project management. He says upfront fees are generally revised annually to ensure that they remain relevant and market-related.

Glenda Zvenyika, marketing communications manager for BP, says the upfront fee gives franchisees access to the business, in other words, the licence to operate a BP franchise as well as in-depth training on how to operate a BP franchise.

Ongoing franchise fees

In most cases, the franchisee is required to pay certain royalties to the franchisor for the various services provided. These are usually worked out as a certain percentage of the franchisee’s turnover, but can also be a fixed amount. “We dislike fixed fees. It doesn’t incentivise the franchisor to help the franchisee achieve better performance,” says Du Toit. She adds that it is also fair if the franchisor benefits as the franchisee grows, because they put a lot of effort in to make sure the franchisee is successful.

According to Kuhl, Java Brands’ ongoing fees are reviewed periodically but do not tend to change often as they are generally contained within a five year franchise agreement. Zvenyika says: “For a convenience store, the fees currently payable are 11%.” She explains that franchisees are essentially paying for use of the BP Express brand, including rentals as the layout and equipment are installed and paid for by BP. Further, she says a portion of their fees goes to marketing material and support, including through-the-line advertising support.

Management services fee

The management services fee is payment for services provided by the franchisor. This comprises general support services and having access to head office support. Franchisor support staff, referred to as field service consultants, should visit stores on a monthly basis. This should not only be done for quality control purposes, but also to discuss things like performance or local marketing opportunities.

Marketing fee

The marketing contribution is usually paid into a separate fund and used by the franchisor for national marketing campaigns, explains Du Toit. Valasis says in most instances, franchisors use this money at their discretion as they see fit.

“The owner of the intellectual property and know-how has the expertise so it is their decision how the funds are used. They can take advice from a franchisee, but the decision ultimately rests with
the franchisor.”

Other fees

Du Toit says some franchisors charge an admin fee, but this is usually if they perform certain functions for the franchisee like book-keeping. However, she explains that this is not the norm. This can be charged as a percentage or fixed, but should be cost-based for the franchisor to recoup costs.

Franchisors could also require franchisees to save up for revamps, which may happen every five years at renewal or when the brand and corporate identity is updated. Revamps can be draining if they are not provided for or planned, so some franchisors ask franchisees to contribute regularly towards them.

A trend in the US, which has been slow to take off in South Africa, is the charging of a renewal fee. “Franchisors have the right to do that, but it has to be noted in the disclosure document and franchise agreement,” says Du Toit. This fee is normally the same as the upfront fee at the time of renewal.

Do the research

Franchisees need to do thorough research before paying any money. Du Toit says franchisees should look for transparency from franchisors. Franchisors should clearly outline what a franchisee can expect for each of the fees. Franchisees can also look at what is market-related by researching what other franchises in the same sector are charging. “The question to ask is ‘what am I receiving for my fee?’”

According to Valasis, all fees should be in the disclosure document. She says the franchisee should have a clear breakdown of the fees as well as details on when they should be paid before they are required to put any money into the business.

Why should you pay?

While buying a franchise can be expensive and a percentage of turnover has to be paid to the franchise head office, buying into a franchise is buying into a proven business concept. “The market is already aware of the brand so you know you can achieve certain levels of profitability,”
explains Du Toit.

Further she adds that establishing and developing a brand from scratch is very expensive and potentially difficult for an individual.

“The negotiating power a group has will also get you better rates and prices from suppliers. It is a bit more expensive to buy a franchise than starting your own company, but your potential to succeed is greater,” says Du Toit.

Can you afford it?

Franchisees should not only look at the upfront and ongoing fees to determine whether or not they can afford a franchise. Franchisees are also required to cover the start-up costs, and some of this has to be money they already have.

“There is no such thing as a 100% loan,” says Du Toit. She says banks are more open to lending money to franchisees than start-ups, as around 80% of franchisees succeed. Banks are usually eager for the business and have dedicated franchising divisions. However, most banks want the individual to take some risk too, so most franchisees are required to contribute around 50% of the total investment as their own contribution. Du Toit says paying back a 100% loan is also not realistic; the business won’t have enough free cash available to service the loan.

When applying for a loan, if the upfront fee is more than R200 000, it is possible that the bank will question the fee and further research will need to be done to determine whether or not this is a fair price.

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Researching a Franchise

The Future Of Franchising Looks Smaller (And Fancier)

Franchises are adding smaller locations and reduced menu options, as niche markets emerge, to attract the customer of the future.

Diana Albertyn

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As the owner of a thriving franchise, you’re well aware of the fact that fluctuations in the world economy has both negative and positive effects on business. When it comes to your successful franchise, tough times could mean adopting new trends or seizing gaps, potentially resulting in a new franchise concept you wouldn’t have otherwise thought of.

“The buzz word in global franchising is ‘flexibility and adaptability’,” according to the Franchise Association of South Africa (FASA). “Whether a result of a need to inject some life into stagnant franchise brands or as a result of the new world order brought about by the recession, franchising is embracing alternative and options in a big way.”

Related: As Consumers’ Tastes Change Can Your Franchise Keep Up?

You can do this by either devising innovative areas to franchise or allowing more flexible ways for franchisees to operate to help with their bottom line. FASA has earmarked these as some of the biggest franchising trends in 2018 and beyond:

Smaller, more cost-effective franchise models

When franchisees don’t have high franchise fees and start-up costs to worry about, they can focus more on what customers want, and deliver. The added benefit of smaller spaces include having fewer employees and reasonable rental.

Among the new frontiers in franchising are the food court losing its legacy as the preferred setting for food franchises, as service stations increase in popularity in the industry. A number of brands – like Steers, Debonairs and Mugg & Bean On-the-Go outlets – are co-locating with major fuel retailers to create fully-integrated accessible centres.

Niche markets are offering one-of-a-kind franchises

“The opportunity to get in on the ground floor of a new franchise trend is also on the rise,” notes FASA. This could be offering a unique gourmet food experience in your outlets or a ‘green’ space of energy saving technology in your operations.

“Consumers have gained control of what they want,” says Morné Cronjé, head of franchising at FNB Business. “It is no longer about what you have on the menu, but how your product or service can be tailor-made to what a customer really wants.”

Founded just five years ago (2013), RocoMamas boasts over 60 franchise outlets, clearly responding to the essence of this trend –allowing consumers to build their own burgers without having to pay for items they’d rather leave out.

Related: Key Franchising Trends To Consider For 2018

Stay ahead of the game

For long-term success, franchisors who want to expand their business should start exploring beyond present circumstances and current predictions.

“2018 will no doubt bring its challenges, however for every challenge there is a window of opportunity to explore. We are advising franchisors to scrutinise these trends carefully, it can definitely give them a boost for 2018,” says Cronjé.

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Researching a Franchise

As Consumers’ Tastes Change Can Your Franchise Keep Up?

More of your customers are eating in, and if you’re not packaging, portioning and pricing your food accordingly, they’re heading to a retailer that does.

Diana Albertyn

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It’s generally believed that it’s cheaper to cook your own breakfast, lunch or supper than to go out and pay a much higher price for the same food in your fridge at home. But today’s consumer’s live fast-paced lifestyles – so food is becoming more about convenience.

31% of 6 022 middle-to-high income South African earners surveyed by BusinessTech, put eating out and entertainment at the top of their list of things they’re most willing to cut their spending on in 2018 to save money. Research by supermarket giant Pick n Pay correlates, reporting an increase in customers buying quality convenience food, not just to entertain at home, but for dining at home.

Related: Driving Your Business Growth Towards More Customers

Consumers are empowered by variety

You’ve heard about the ‘fast casual generation’, aka Millennials? They are demanding healthy, affordable eating experiences. But do you know how this affects the future of the food industry, and your business in particular – because they’re not the only ones adapting their lifestyles.

An increasing number of food brands and chefs are compelled to create complete ranges of new, convenient meal options that are not only packaged, portioned and precooked attractively, but affordable too.

The fastest growing sector of retail foodservice for the past four years has been the convenience store sector. Non-traditional avenues of distribution are growing, gobbling market share while establishing new patterns of consumption, price points, and customer loyalty.

Shoppers are becoming value-focused

A savvy franchise would acknowledge that although pre-packaged and pre-cooked convenience food isn’t a new trend among consumers and supermarkets, it is gaining popularity. “Some of the most notable trends in 2017 were an increasing shift to convenience foods as customers looked for both value and convenience,” says Pick ‘n Pay’s Head of Marketing, John Bradshaw.

Related: 5 Techniques To Leave Customers Grinning And Vowing To Return

Value for money and healthier food choices will continue to be top of the convenience food list for consumer in 2018, as more shoppers cut down on luxuries.

“We’ve seen significant growth in the number of customers looking for an easy way to enjoy a good meal without the cost of eating out,” says Bradshaw.

But he cautions that South African shoppers have always been value-focused, and while the most significant shift Pick ‘n Pay has seen is how all its shoppers, no matter what their income levels, are watching their budgets.

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Researching a Franchise

Maximise Your Social Media Reach This Holiday Season

Quick and cost-effective, social media is your best tool to reach target markets when it matters most – during the holidays.

Diana Albertyn

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It’s not just the end of the year that can be lucrative for businesses. School holidays and other major breaks during the year present consumers with more time to spend shopping. Why not ensure money is spent at your franchise by capitalising on the minimal cost and maximum exposure of social media?

You don’t have to create entirely new deals or promotions from what you may already have running on your store, but find a way to make it special for your social media followers, suggests Kelly Mason, marketer at Customer Paradigm.

Holiday campaigns on Twitter, benefitting from popular hashtags, streaming live content, and receiving information instead of just distributing it via social media are just some of the ways to stay ahead of the competition.

Related: Why Your Business’ Social Media Marketing Strategy Is Probably Wrong

Know your customers well

The first step to attracting customers and getting them to complete a sale is understanding their customer journey.

“Being able to document where they spend their time online, which social channels they use most, and what they’re reading or watching on those channels is a huge plus. Finding that crucial information is fairly easy to do, thanks to modern-day marketing tools and resources,” advises Paul Herman, ‎VP: Product and Solutions Enablement Group, at Sprinklr, a unified customer experience management platform for enterprises.

The better you understand your customers, the easier it is to reach them through a campaign optimised for their interests.

Master social listening

You could be using social media all wrong in the run up to all your holiday campaigns. Perhaps it’s time you used this platform to listen to your customers?

“Through social listening, marketers can identify major trends and product keywords in their industries,” says Herman. “For instance, knowing those keywords can help marketers identify which social platforms are more popular for a target audience. With that information, they can make smarter decisions about where to spend their money and which products or services to promote on each platform.”

Related: 10 Laws Of Social Media Marketing

Use the information gathered to determine what customers like about your product, what they dislike about it, and how you can improve upon it so they can buy more of it. The more of this data you collect, the better and more effective your interactions with customers will be.

Try something new

50% of consumers look for a video of the product they want to buy before going to an ecommerce store to buy it, according to a 2016 Google survey. “Video can be an extremely effective way to get your customers to take action – in this case, to make a purchase with your store,” adds Mason.

Video adverts are often used as an experimental tool in social marketing and switching it up on platforms such as Facebook Live, Instagram Live, Instagram Stories, or Snapchat – depending on your brand’s activity and your audiences’ interests – can help attract customers during seasonal periods.

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