By Eric Parker

I have noticed several franchise brands for sale recently and what stuck out was that they all charged approximately the same upfront fee, royalty and marketing fee, regardless of how well established and successful they are and whether a support infrastructure is in place.  This doesn’t seem justified when comparing developing franchises to established brands.

In other words, why should a new, relatively unknown chicken brand charge the same fees as a KFC?

Let’s review the benefits a KFC franchisee would have over a new, relatively unknown brand

  • Immediately generates high sales due to brand strength and support
  • Superior procurement means better prices at both franchisee and consumer level
  • Experienced support structure in place
  • Much larger marketing budget
  • Proven systems and controls
  • Established training facilities
  • Experienced site selection and better negotiating power with landlords
  • Cheaper store build due to experience and procurement strength

On the other hand, the benefits of purchasing a developing franchise are:

  • Easier to obtain a franchise
  • Should get a better location as the franchise is not saturated yet
  • Easier to become a multi-unit franchisee as the franchisor is likely keen to expand and looking for franchisees who would take on multiple stores

What are the disadvantages of buying into a new concept?

  • The risk is much higher as the brand is not well known and has less of a track record
  • More working capital will be needed to generate sales to reach break even as the brand is still building market acceptance
  • The franchisee will not get the immediate benefits of an established brand, i.e.
    • Brand strength
    • Purchasing power
    • Support / training
    • Large marketing budget
    • Favourable treatment from landlords for site selection and rent
    • Difficult to sell products or services at a premium price

While it doesn’t seem fair that a newcomer franchise charges the same premium fees as an established franchise, it does present a “Catch 22” because we know that new franchisees in a new brand needs special attention and support. So how can you deliver this if the franchise fees are reduced or less than the market average?

So what could a possible solution be?

The up and coming (developing) brand could reduce the franchise fees for an initial period (possibly one year) to give the franchisee a better chance of breaking even.  In addition to that, the franchisor could charge a pre-determined fixed fee for franchise support staff to visit and support the business for the first week of opening and then to be present for one day per week for the first 2 months of operation.  By doing this, the franchisee will perceive and get real value for fees paid.  The royalty can then revert to a normal royalty after a pre-determined period, whether a year or less.  Of course, these conditions would have to be covered in detail in both the disclosure document and franchise agreement.

This article was meant to generate some thought and discussion on developing brands and their fee structures.   We believe that a different approach to structuring fees in developing brands could help them to recruit good franchisees in these difficult economic times while providing real value and support to new franchisees. Please share your comments with us here.