The money side of franchising
Your core business will not really grow unless you are a manufacturer or importer of products and your franchise system is a distribution network, or unless you sell your core business’s services to franchisees or their customers.
You can spend a lot of money ($60,000+) on consultants / manual writer / designers / lawyer / trade marks and patents / business broker setting up the franchise package and getting franchisees signed up. It is your choice about how much professional help you get. Many franchisors have started successful franchise systems without external advice, but many franchisors are happy to engage specialists to ensure a professional and focused project.
You will normally get an upfront payment (initial franchise fee) from new franchisees – normally anything from $10,000 to $70,000 covering the grant (sale) of rights. Hopefully some profit or capital income is included here. You might also charge other upfront costs separately such as training, provision of standard equipment, premises fit-out etc.
Most franchises then have ongoing payments throughout the term of the franchise – percentage royalty or fixed fees or simply markup on goods. Often there is a separate marketing contribution payable and there can be other fees and costs depending on the services and support provided by the franchisor.
The Franchisor will have ongoing overheads and capital costs in marketing, product development, and support of the franchisees. It is not uncommon for a franchisor to lose money operating a franchise network.
Some systems have a lower entry cost with more focus on ongoing value and support which justifies a royalty or ongoing fees. These systems need more franchisor support and input, and the franchisor benefits from successful franchisees.
Some systems might have the bulk of the value handed over at the beginning. For example where a specialist trains a non-specialist in a trade or skill, gives advice and assistance on starting up a business and hands over a manual or other tools for the franchisee to go off and run the business. It would be acceptable here for income to the franchisor to be focused on the upfront payment and upfront value. It may be that the level of ongoing association is low. This is fine if the franchisor has little to lose if a franchisee does not continue the business, or, acts inconsistently with the system or standards.
About Sarah Pilcher
She has strong interest in intellectual property and international trade. As well as working with many well known franchise systems Sarah’s areas of expertise include structure of business ownership; I.P licensing; supply, distribution and trade agreements; business mergers and acquisitions; JV and shareholders agreements; employment and independent contractor agreements.
Sarah has worked outside the law in the real world of business and knows that business people need lawyers to quickly assess and understand the commercial situation as well as the legal issues. Sarah works with businesses in all industries and has extensive experience in import and export of products and business systems internationally.
She enjoys getting to know clients and their businesses and reflecting their specific requirements and circumstances in the advice and options she gives, and the documents she writes.
Sarah works in the franchise law team at Davenports Harbour Lawyers, a well established Auckland law firm and is also available independently for project and in-house consulting work.
