Franchisors charge franchise fees and royalties for many good reasons. The fees may seem excessive at first glance, but when you carefully examine the value proposition, you might be convinced otherwise. Here, we look at some of what those fees pay for.
Economies of scale
When you buy into a franchise, you benefit with economies of scale. With more purchasing power, the system provides discounts for products and services at rates lower than you could get on your own. This might be as simple as discounts on shipping, telephone services, computer services and technology. Some brands also include discounts on products for resale, creating better margins and lower costs for you as a franchisee. This improves your profitability and gives you a tremendous advantage. Depending on the brand, you can start your business as a preferred vendor to potential customers and have business waiting for you the day you open for business. These relationships would take significant time and energy to develop on your own.
Franchise brands develop themselves over time and those lessons and efficiencies become ingrained into the system as they innovate, develop and evolve. This comes through in the training in the beginning and with ongoing support as you continue running the business. Essentially, you’re only paying a small portion of all the mistakes the franchisor has already made and paid for before you arrived. The founders and early adopters of a franchise system have made plenty of mistakes that have cost plenty of time and money. Franchisees reap the rewards of a franchisor’s struggle.
When you join a franchise system you become “part of the family.” You get training and support and resources from the franchisor’s corporate team. You also get the benefit of sharing best practices with other franchisees—which is very valuable since they are in the same business as you. Chances are they’ve learned a thing or two about how to make the business really work and can share tips and tricks. Fellow franchisees want you to be successful because it builds shared brand equity.
Most franchise brands have an annual convention or gathering of all their franchisees. Typically, there are some great educational sessions around the business in areas such as operations, marketing, finances, products, and sales. Many brands bring in outside speakers who might have great messages and insights in areas such as leadership or customer service. These are great resources that come as part of franchise ownership. My advice is to always participate in the system meetings and training sessions to get the most out of franchise ownership. After all, that’s what you’re paying for. The franchisor provides these to you to help you be successful. It’s an opportunity to participate, learn and engage those new ideas in your business to improve chances for your own success and the entire system.
When it comes time to sell your business, the process will be much easier with a franchised brand. With a corporate team at your disposal, you have experienced pros on your side who can give you guidance and make the overall transaction smoother. The power of branding means your business is a known entity, so there will be more of a comfort level with potential buyers.
Market valuations favor franchised businesses resulting in better returns on the investment for the investor. Franchise brands build equity over time, as they grow and expand. The collective brand equity is shared with the franchisee.
Better Chance for Success
Being an entrepreneur is difficult and starting a new business from zero is a very big challenge. When you invest in a franchise, you are working as an entrepreneur on your own business, and leveraging the experience and proven systems of the brand. Your success is much more likely because you are following that existing established acknowledged business system and brand.