15 January 2024

Franchisors: The Money Makers

By Ronald Smith

When it comes to running a franchise, have you ever wondered where the owners make their money? Well, I’m here to shed some light on this intriguing topic. Franchisors have a secret recipe for success that goes beyond the delicious food or amazing services they offer.

So, let’s dive right in and explore the world of franchisors!

First of all, it’s important to understand that franchisors are the ones who grant the rights to operate a franchise. They are like the big bosses, providing aspiring business owners with a proven business model and ongoing support. But how do they make their money?

Fees: Franchisors rely on various fees to boost their revenue. As a potential franchisee, you’ll typically encounter an initial franchise fee. This fee grants you permission to join the franchise family and benefit from their established brand. It’s like buying a golden ticket to success! Franchisors may also charge ongoing fees, such as royalties based on a percentage of your sales. These fees help them cover the costs of supporting and advancing their franchise network.

Supply Chain: Franchisors often have control over the supply chain. This means they can negotiate favorable prices with suppliers and pocket the difference. Imagine being able to get the best ingredients at a lower cost, giving you a competitive edge in the market. That’s right, franchisors know how to make the most of their purchasing power!

Real Estate: Franchisors can also benefit from the real estate aspect of their franchise system. They may have the power to select and purchase prime locations for their franchises. By owning these properties, they generate additional income through rental fees paid by franchisees. It’s a smart move that helps them reap the rewards of a thriving business location.

Marketing: When you see a successful franchise, it’s often because they have a solid marketing strategy in place. Franchisors invest in marketing initiatives to promote their brand and attract customers. They may require franchisees to contribute to a marketing fund or pay into a national advertising campaign. By pooling resources, franchisors can create powerful marketing campaigns that benefit everyone in the franchise network.

Endorsements: Franchisors sometimes have the opportunity to endorse or partner with other businesses or products. This provides them with additional revenue streams. Imagine if your favorite franchise partnered with a popular toy brand, resulting in exclusive merchandise and increased sales. It’s a win-win situation!

In conclusion, franchisors make their money through a combination of fees, streamlined supply chains, real estate investments, effective marketing strategies, and beneficial endorsements. So, the next time you enjoy a tasty meal or experience exceptional service at a franchise, remember that there’s a lot more going on behind the scenes. The franchisor’s secret recipe for success is what keeps them and their franchisees thriving!

Franchisors: The Money Makers

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I’ve got a challenge for you, if you’re ready. Are you up for it?

I want you to forget everything you think you know about franchising for a little while. Imagine that you’re learning about it for the very first time. Embrace the novelty of it. Sound good?

Let’s imagine that you’re the proud owner of a dog-training business. Your business has been steadily growing ever since you started it four years ago. Each year, you’ve hired more people, and now you’re thinking about expanding, especially since you recently came across a perfect commercial space in an industrial park a couple of suburbs away.

In your head, now seems like the perfect time to make this move, with small business loan rates being at an all-time low.

I’m just getting started here. What I really want to do is transform my dog-training business into a franchise. This way, I can keep expanding my business using other people’s money (OPM). That’s how franchisors make their moola.

How Franchisors Make Money

At first glance, it seems like a fantastic plan. I would invest the necessary funds to franchise my business, and once I started selling franchises, I could recover my investment.

  • Franchise fees
  • Ongoing royalties

Building a Franchise

If I’m going to turn my business into a franchise, I need to make the right moves from the start. My dad, who is no longer with us, taught me something valuable about developing a franchise, and it involves money. He said that the biggest mistake people make when they want to franchise their businesses is trying to do it on the cheap.

Let me give you a perfect example. Imagine someone who only uses a lawyer when they’re creating their franchise idea. Now, don’t get me wrong, the legal stuff is important. But it’s not the only thing you need to think about when developing a franchise. And yet, when I talk to people, it seems like they’re only thinking about the legal side of things.

Setting up a franchise with just legal fees can cost around $15,000. You might get away with spending less than $20,000 to get everything started. But let me tell you, that’s not enough to make your franchise successful. There’s a whole lot more that goes into franchise development.

Here are just a few things you need to consider:

  • Creating a business plan
  • Writing an operations manual
  • Developing a marketing plan
  • Building a website
  • Implementing technology
  • Creating a training program
  • Recruiting franchisees
  • Setting up a support system for franchisees

The Most Important Thing

If you want to turn your business into a franchise, it’s crucial to work with a franchise development company that can assist you with every aspect, from start to finish.

If you don’t, you’ll be lucky if you can sell even one or two franchises, and there’s a chance you won’t sell any at all.

A Piece of Advice

Before you decide to hire a franchise development company, make sure you do a thorough background check on them. Ask for plenty of references.

You might discover that some of these companies are a little too eager to transform your independent business into a franchise.

The idea of being the CEO of a franchise chain with 250 units is very appealing. You might even imagine yourself living in a luxurious 5,000 square foot beachfront home in Maui.

Listen up! Being a franchisor comes with its fair share of expenses, but trust me, it’s worth it.

Every single person I’ve talked to who wants to become a franchisor dreams of selling 100 to 200 franchises. Why? Because that’s where the big bucks are. And guess what? The simple math I just laid out proves that it’s not just a dream, it’s totally doable.

  • First things first, come up with a killer concept.
  • Invest some money upfront to turn it into a franchise.
  • Get other people’s money (OPM) to help it grow.
  • And then, sit back and watch the people who invested in your franchise pay you royalties every single month for using your business system.

Boom! As a franchisor, you’re raking in the cash from your franchisees.

But hold your horses. It’s not as easy as it sounds.

According to Lonnie Helgerson, a franchise development executive who recently wrote a book called Five Pennies, Ten Rules to Successfully Build a Franchise Mega-Brand And Maximize System Profits, I learned that franchisors don’t make their profits from the franchisees.

In Helgerson’s book, he explains:

I always tell my team that as franchisors, we don’t earn our money when we receive a royalty check. We, along with our franchisees, earn it when a customer makes a purchase at the point of sale, and our role is to help our franchisees generate lots and lots of sales. Forgetting about this fact leads to fewer sales, frustrated franchisees, and eventually, a significant problem with our brand.

I totally agree with Lonnie. If you want to be successful as a franchisor, you have to offer an amazing product or service that will make your franchisees earn lots of money.

And if your franchisees aren’t successful, it means you won’t be either.

So, before you even think about turning your business into a franchise, make sure that what you’re offering is absolutely fantastic.

Because if it’s not, your business might go downhill.

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