Franchising/Some questions about franchising my business
I have got a hobby business that sells small parts. Currently we have two stores that both perform well. We operate out of a central warehouse. I would like to open more stores under a franchise system. But before I get too ahead of myself, I have some basic questions that I can't quite figure out.
1.) How does a business that has a reasonably large inventory deal with stock? We have approximately 7000 products. Would the franchisee buy the stock from us at cost? Or do we mark-up the stock and that's how we make our profit? I am concerned the franchisee would also buy stock from other sources - which is something I do not want them to do.
2.) What are some of the ways franchisors make money? As a percent of turnover? A percent of profit? On sale of stock? A fixed fee? What's the best?
3.) What sort of income do franchisees expect from a business? Is it based on what they pay for the franchise? I would expect in my business they would need to work in the stores for it to work. But I would imagine the franchisee would buy this type of franchise because they enjoy this line of hobby and would want to work in the store.
4.) What should a franchisee pay for the franchise? How is it calculated?
5.) Do I have to offer any sort of guarantees to the franchisee? The business would only be successful if the buyer puts in the effort.
6.) How much control over a franchised store would I have? In terms of opening hours, displays etc.
7.) How does the cost of advertising work? Can each store pay a yearly fee (perhaps a percentage of advertising costs?)
Ok, I think that's it! I really appreciate you taking the time to answer my questions.
Dear Michelle: Thanks for your questions. I'll answer them according to your numbering above.
1) It sounds like the stock your franchisees will need is not comprised of items that are proprietary to your system. In that case, you would give the franchisee a limited list of approved suppliers they would purchase from but they would also have the option of proposing other suppliers for you to approve. As the franchisor, you will likely be able to negotiate better prices with suppliers than the franchisee can do on its own, so the franchisee will be motivated to go with your supplier. Antitrust laws may come into play here too, so it's important to get good legal advice. I can provide referrals to attorneys in this area if you'd like.
2) Franchisors can earn money through a mark-up on product sold or leased to franchisees #such as inventory items, software fees, marketing services), through a royalty stream #as a percentage of the franchisee’s revenue) or through other fees for services to franchisees. In some instances suppliers to the franchise system will also pay fees or commissions to the franchisor, but these are often used by the franchisor to benefit the system as a whole. I cannot tell you “what the best” is until I know more about your system.
3) It depends on the type of franchise, the size of the investment and skill sets that an individual has. In order for a business to be franchisable in needs to be able to:
*Supply a franchisee with a return on their initial investment of around 15% and
*Compensate the franchisee for their time and effort in the business. What would the manager of a similar business and skill sets earn? The franchisee needs this compensation as well.
There are certainly advantages to the franchisee working in the business if what you will be selling are single units. Passive investors are typically only appropriate for larger or multi-unit chains.
4) The initial franchise fee will be calculated based on the franchisor’s cost in providing the initial support to the franchisee and is more of a cost-recovery tool than a profit center . There are several methodologies iFranchise Group uses in getting to the recommended number and I would be happy to discuss further. This figure and the amount of royalties cannot be guessed because a mistake of even 1% in royalty determination could have huge financial consequences for the franchisor.
5) The franchisor does not typically offer any type of guarantee but you need to understand the types of protections the law provides to franchisees. Are you thinking of franchising in Australia or bringing your concept to the United States?
6) You can establish controls to protect your brand and your intellectual property. To be more specific, I would need to know more about your system.
7) As franchise systems grow, many implement an advertising fund where all franchisees contribute and the advertising benefits the system as a whole. Sometimes, these funds are established on a regional rather than or in addition to a national basis.
You can require your franchisees to spend a minimum amount of advertising in their market as well.
Michelle, please feel free to reach out to me directly at email@example.com if you wish to discuss further or you can connect with me through our website www.ifranchisegroup.com. I have a seminar video on how to franchise your business that is free and that could help answer many of your other preliminary questions.