Franchising is an effective and efficient way of establishing and consolidating a business where the franchisor does not lose his/her/their hold or equity in a business venture while also spreading the business and making healthy returns. Not all businesses would want to play around with the equity stake. Unless they slowly want to exit, most businesses are averse to let go their equity and would like to have managerial command on their asset of which goodwill and brand-name could be an important part.
For the above reason, people prefer franchise opportunities by given limited rights to use one’s logo, trade-mark and other identifiable marks while dealing with products that the public identified with the logo. Examples abound like KFC’s famous chicken, Pepsi and Coke’s beverages, Baskin Robbins’ ice-cream range and Subway.
This brings us to the question: How do the most lucrative franchise owners make money? From experience, it is today clear that among the rules of being a franchisor, following are the ways by which the most lucrative franchises make their millions:
- Fixed one-time fee
Where the franchise is of a fixed duration, and both the parties are sure about being able to sustain things, the right to use one’s logo, brand-name, and product know-how, goes for a fixed one-time lump-sum fee. None of this comes back to the franchisee even if things do not work. Similarly, the franchisor cannot expect to make anything else where the arrangement turns into a run-away success bringing the franchisee windfall gains.
- Fixed one-time fee broken down into monthly instalments
While the above may sound the most ideal, it may not work for quite a few reasons including the fact that without an enterprise, the franchisee may not be tempted to part with large sums of money, irrespective of the worth and value of a franchise brand. Also, where the franchisee puts in large sums to get put infrastructure in place including establishment, promotion, staff, training, and the likes, they may simply not agree with one lump-sum as franchisee fee. In this case, the fixed one-time fee could be broken down into EMIs for the duration of the agreement.
- Fixed + variable
While the above 2 modes of payments to the franchisor may sound plausible for fixed-duration contracts, a closer look would clearly show the implied chinks, one of which is the fact that most franchise contracts are never time-specific and are kept open-ended so that parties continue as long as the gravy train runs its course. That being the case, most entrepreneurs on either side prefer a certain fixed some of money up-front or in the form of EMI in addition to a variable component which could either be a percentage of the profits or sales. Doing so takes care of being equitable and is less burdensome, and most of all, covers costs of the franchisor and lets the latter have an income in the form of % of sales/ profits.
- Royalty as % of business + a guarantee
Besides the above which does sound plausible, there could be another arrangement. Instead of a fixed component, the franchisee could contract to pay the franchisor a percentage of sales/ profits and in addition, keep aside a sum as a guarantee in the event of the contract being terminated prematurely or to obviate the franchisor’s allegation of not having made any gains from the deal. The sum so kept aside could be in the form of guarantees with banks or reputed financial bodies.