How do Franchise Businesses Earn Money

Within the franchising industry, both franchisors and franchisees generate revenue through various channels. Franchise Administration has included the steams on how franchise businesses earn money, to generate income for the business and provide financial support for business growth and development.

Franchise Joining Fee

One of the primary sources of revenue for franchisors is the franchise fee. The franchisee makes this upfront payment to the franchisor for the privilege of joining the franchise system. The franchise fee varies depending on the brand, industry, and level of support offered by the franchisor. It compensates the franchisor for the provision of training, access to the franchise system, brand recognition, and the initial set-up assistance provided to the franchisee. This grants franchisees the right to operate under their established brand.

Store Setup Costs

Store setup costs may vary between brands and even within brands. These costs include all the fixtures, fittings, and start-up stock to start the franchise. The fixtures may consist of signage, furniture, equipment, and everything that goes into the outlet, preparing it to trade.

Monthly Franchise Fees

Franchisors usually receive ongoing royalty fees from their franchisees. These fees are usually calculated as a percentage of the franchisee’s sales and are paid at regular intervals (weekly or monthly). Royalty fees are essential for the franchisor as they represent a continuous and reliable stream of revenue. These funds are reinvested to support the franchise system, provide ongoing support and training to franchisees, and drive marketing initiatives to enhance brand visibility.

Monthly Marketing Fees

Franchisors may require franchisees to contribute to advertising and marketing funds. These funds are used to develop national or regional marketing campaigns, promote the brand, and enhance overall brand recognition. Franchisees usually contribute a percentage of their sales towards these fees, enabling the franchisor to drive effective marketing initiatives. With this revenue stream, the franchisor benefits as the brand value increases.

Merchandise

In some franchise systems, the franchisor may sell products, supplies, or proprietary software directly to their franchisees. These sales generate additional revenue for the franchisor and offer franchisees the advantage of sourcing their essentials directly from the brand owner. Franchisors may also offer training programs, specialised tools, or add-on services for which they charge a fee. It is important to note that the franchisor cannot profit from franchisees in terms of products and services sales, as stipulated in the Competitions Act. However, franchisors need to offer the products or services at a market related fee and only cover their procurement and distribution costs of the product or service offering.

Franchise Renewal Fees & Revamp Costs

Franchisors also earn money through transfer fees when a franchisee sells their franchise to a new owner. This fees helps to cover the costs associated with facilitating the transfer of ownership and ensuring that new franchisee meets the franchisor’s qualifications. Additionally, franchisees have to pay a renewal fees when they renew their franchise agreements after the initial term. This fees ensure that the franchisor continues to receive revenue from existing franchisees. Revamping in franchising is also a revenue stream of importance. Revamping ensures that franchisors offer the best possible experience to their franchisees and customers, which is crucial in staying relevant to continue to grow the franchise brand.