Want Successful Franchisees? Charge Higher Franchise Fees

Don't lower your franchise fee if you want your franchisees to be successful. In fact, you might consider raising it, so long as the funds are pumped into training and development. That was a big takeaway from a study by FranData that compared fees and royalties with franchisee success, presented at our Franchise Finance & Growth Conference this week.

Franchisors might consider reducing their royalty rate instead.

Over the years, franchise fees have increased, FranData CEO Darrel Johnson. He analyzed 11 brands in one sector and found that their annualized franchise fee increase between 2008 and 2012 ranged from 1.87 percent to 21.67 percent. The average fee across industries was $35,185, but ranged from just under $29,500 to $43,571.

To be sure, most of the fee ultimately funds the process of getting that franchisee—roughly 80 percent of a franchisee funds franchise development, according to one sample of 100 brands in different industries.

Yet you get what you pay for: concepts with higher fees had better unit growth from 2006 to 2011. They also had better revenue growth—their three-year average revenue growth was more than 20 percent for higher-fee franchises, compared with a decline of about 4 percent for lower-fee companies. Average unit revenues for higher-fee companies are higher and they had lower failure rates.

The reason? Franchise systems with higher fees were much more likely to invest more in training. Higher fee companies on average had more than double the training hours of the lowest fee franchises, according to a sample of 41 brands in 11 industries. "Those franchisors with higher initial fees are providing a lot more in the way of training and support," Johnson said. "Maybe you are getting what you pay for."

So what about royalties? Again, royalties are complex, varying in amount and their structure, and they varied widely, from an average of 4.47 percent at sit-down restaurants to 6.98 percent  at automotive companies. On average, franchisees were charged $35,293 a year in royalty payments (but, interestingly, they paid 19 percent less because of discounts and incentive programs in recent years).

In this case, higher royalties don't translate into success. Higher royalty companies had higher failure rates and poorer continuity rates and they had lower average revenues. Yet Johnson wasn't ready to conclude that there is a definitive connection between royalties and success and said the relationship isn't as clear. Yet we might note that lower royalties, especially in a time of tight margins, can improve profits and keep franchisees afloat.

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About This Blog

News, notes and commentary on franchise financing, including SBA lending, both the SBA 7(a) program and the SBA 504 program, franchise finance programs, development incentives, big deals and startup lending.

  Mary Jo Larson is the publisher of Franchise Times Magazine and its sister publication, the Restaurant Finance Monitor. She is a frequent speaker at meetings and conferences, and at the Restaurant Finance & Development Conference. You can find her on Twitter at @mlarson1011.
  Reporter Jonathan Maze covers restaurants and finance for Franchise Times. He also writes for our sister publication, The Restaurant Finance Monitor, and writes a daily blog on the restaurant industry at www.restfinance.com. You can also catch him on Twitter at @jonathanmaze.




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