The science behind the up-front franchise fee

Essentially, this initial licence fee is designed to cover:

• The right to use the Intellectual Property (IP) of the franchise

• IP includes brands, logos, systems and processes, ‘the way of doing business’.

It reimburses the franchisor for their time and cost to develop, test and refine the franchise business model. It includes the development of the brand, marketing, systems and processes, management, sales and recruitment costs.

For instance, if total costs were $1.0 Mill and you planned to sell 20, then the fee would be $50,000.

But does it work like this in real life?

Not really. In fact, sometimes not even close.

Market forces tend to dictate what an ‘acceptable’ franchise fee is. On a comparative basis.

(But this assumes that prospective purchasers are comparing on an ‘apples vs apples’ basis).

In fact, some start up’s are charging NO up-front fee, just to get their numbers up. In these cases, the right to charge the up-front fee is ‘waived’ for the first few franchisees, the early adoptors. The franchisor is banking on the fact (hope?) that future royalty income will compensate them for this shortfall.

Others are using it as a ‘value statement’. Linking the price they’re asking to the perceived value of the brand.

While there is definitely some substance to this, there are no hard and fast rules.

So, in your assessment, be sure you are comfortable that the price you are paying represents good value to you. That the right to use this brand will help you achieve your goals.

Let me know if you need a hand, when it comes to assessing the value of the total price you are being asked to pay.
Peter