Franchisors: How To Determine Your Initial Franchise Fee
So, you’ve started your own business and now that it’s successful you want to franchise it. But how much are people willing to pay for a franchise? A good first step is to consult with a franchise attorney to get more information on your specific business. Most franchisors set their initial franchise fee between $15,000-$75,000, however many factors are taken into consideration when deciding on an amount. Here are a couple things to consider:
In general, an initial franchise fee should be about 1/5 to 1/3 of the first year’s expected revenue. In general, an individual investing in a business expects to recoup his or her total initial investment within the first 2-3 years of operation. This expectation is no different for someone purchasing a franchise. It would be difficult to find an individual willing to purchase a franchise with an initial franchise fee of $50,000 if they thought they would only make $40,000 in sales during their first year. Its best to take a step back and take a hard look at what number is a realistic sales goal for a new business.
Know Your Market
Another good place to start is by comparing other initial franchise fees within your market. An individual looking to buy a franchise from you will likely be considering other franchises. If your initial franchise fee is on the high-end without distinguishing advantages, a potential buyer may choose to purchase a franchise from one of your competitors. Even though every franchise must disclose their initial franchise fee in their Franchise Disclosure Document (FDD), it may be difficult to find other franchises’ FDDs. Asking your competitors for their FDD may not be the best approach, however, a franchise attorney can help determine your market.
Some franchisors may be able to charge different initial franchise fees depending on the size of territory the business will cover. This model is best used with businesses that provide services such as handyman repair or moving companies. Territories are usually calculated based on the number of households or population of the area. A franchisor may be able to charge different amounts between an exclusive territory of 100,000 homes and 300,000 homes. In addition, a franchisor may give a franchisee a discount when they buy more than one territory at the time of purchasing the franchise. This encourages franchisees to make a larger initial payment when they know their territory will be exclusive. A franchise attorney can help you determine the best approach for your specific business.
For a business just starting to sell franchises, it may be difficult to charge a high initial franchise fee when the brand name isn’t widely known. But in good news, as a franchisor you aren’t stuck with the same initial franchise fee you selected when you first start out. This means after you’ve sold a few franchises and started developing a well-known name, you can increase your initial franchise fee.
If you are interested in learning more about how to franchise your business or how to set up initial franchise fees, give us a call at 720-999-5517. We’re happy to help.