Royalties Forever? Find out what happens to your franchise fees.
Q: I want to buy a franchise and have looked at several companies. They all charge an upfront franchise fee and ongoing royalties based on my sales. I don't mind paying a fee to learn the business and for the help in getting started, but why should I have to pay a royalty forever? What will I get for my money?
A: This is a great question to ask each of the companies you're considering.
In general, royalties are used to fund the franchise company. They provide income to the franchisor and compensation for the continuing use of the trademark, and allow the franchisor to provide services and support to its franchisees. The amount and types of support provided varies among franchisors, even within the same industry. Comparing both the initial and ongoing support and services provided by each of the companies you're considering may help you decide which franchise is best for you.
Some of the support services provided by franchisors include:
Research and development. A good franchisor invests in staying ahead of the curve to meet market demand for products and services, and will have a staff devoted to developing, testing and instituting new products and enhancing consumer services. This is especially important in today's economy where consumers have access to a wider variety of products and services via the Internet.
Operating system upgrades. Technology has had a dramatic impact on the way business is conducted. Good franchisors are constantly looking for ways to improve their operating systems and keep their franchisees competitive.
Ongoing training. As new products and technology are introduced, franchisees and their staff need to be trained. A good franchisor has a program for ongoing training in place and is committed to providing the necessary training or has systems to keep everyone in the system current.
Field support. A measure of the value to you of the franchisor's field support is the credibility of those on the franchisor's staff who are providing the support. Talk with franchisees currently in the system to determine whether their field support consultant has experience in the business and is knowledgeable about general business practices and whether they find the visits of their field staff contribute to the growth of their business.
Marketing support. An experienced and professional marketing staff is a plus for any franchisor. Ask what type of market research is conducted, how often new marketing programs are developed and if localized marketing materials are available from the franchisor.
Meetings and conventions. An important reason for joining a franchise system is to benefit from being part of a network. A good franchisor uses conventions and meetings to introduce new products and marketing programs, to update franchisees on the "state of the union" and to conduct training. Talk with current franchisees to determine whether the franchisor's meetings and conventions have provided value.
To summarize, the royalty payments of all franchisees are used by good franchisors to provide the quality of support that individual franchisees can't afford on their own and to help improve the performance of the entire system. So be sure to determine which franchisor will provide the services you really want and need.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the bookFranchising for Dummiesand a former member of the International Franchise Association's Board of Directors and Executive Committee.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
