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Making Sense of the Franchise Fee and a Franchise Territory

There’s a common misconception out there that when a person buys a franchise, the franchise fee that is paid by the person buying a franchise is contingent upon the size of the franchise territory that is awarded. While this is currently not the case, there was a time years ago, when franchisors charged a fee just for the franchisee’s territory. Why has his practice gone by the wayside? Well, ask yourself, what was the franchisee really paying for, AIR?? 

Are You Selling Air?

The idea of charging someone for airspace (for example a cost per thousand people in a population) disappeared long ago mainly because it was an unsubstantiated fee. In fact, nowadays, some franchisors don’t give a franchise territory at all, so the notion that the franchise fee is based on territory size alone doesn’t make sense (read “How the Franchise Fee is Determined“). The franchise fee is by definition a reimbursement for the time, energy and money that the franchisor spends to train, recruit, market and bring on a new franchisee into the franchise system.

Therefore, the franchise fee is really determined by the deliverables the franchisor is providing to the new franchisee. While the franchise territory may be one of the deliverables, it is only part of the whole package.

What Are Deliverables?

Typically franchisees expect that when they jump into a franchise system they are given hand-holding guidance from day one, all the way through the process to get the business set up to the day they open for operation. Therefore, the franchisor is expected (as part of this relationship) to provide the franchisee with assistance, guidance, support and anything else the franchisee needs to successfully open his/her business (read more about a franchisor’s role). This includes whatever time and resources the franchisor has to make available to the franchisee. Let’s explore what are defined as “deliverables.”

  • A comprehensive training program, typically at the franchisor’s corporate location. This could range from a few days to a few weeks, depending upon the concept;
  • Onsite training at the franchisee’s location in preparation for and after opening for operation (pre-opening and grand opening assistance);
  • Confidential operations manual and materials, which may include proprietary software that the franchisor has developed and is necessary to operate the business (check out this article for more details about the operations manual);
  • Some type of web presence (web page or website, depending on the concept);
  • The franchisor may provide a private intranet portal for franchisees to use;
  • The franchisor may provide access to a mobile app that has been created specific to the franchise system;
  • The franchisor may provide some type of startup package, to include things like marketing materials, products, etc.;
  • And, of course, if a franchise territory is provided, the rights to a protected territory is a deliverable. Which means that the franchisor will not open another franchise or company-owned business in that defined area.

These are a few of the BIG ticket items that are typically part of what the franchisee can expect as deliverables to justify the franchise fee. Of course, as the franchise system grows and becomes more valuable, the brand becomes more valuable. Therefore, demand for the franchise may also justify a higher franchise fee.

So, whether a franchise territory is given and regardless of how BIG of a territory is awarded, it is typically irrelevant to the franchise fee. If a territory is awarded, it is up to the franchisor to decide whether it should be bigger or smaller based on the geographic area where the franchisee wishes to operate his/her business. And if the franchisee wants a larger territory than the franchisor has determined, it may mean that the franchisee purchases an additional franchise!

So Size Really Doesn’t Matter!

When it comes to the franchise fee for your concept, The Franchise Maker will work with you to determine what deliverables you will be providing, in addition to what your competitors (or other like-and-kind franchises) are doing in the marketplace (learn more about the process how to franchise). We will identify if providing a territory makes sense, how a territory is determined and will work to build you a franchise structure that will position you aggressively and attractively in the marketplace. The best part is you don’t have to come to the table with anything figured out! We guide you through every decision! Call us directly at 1-877-615-5177 and let’s see if franchising makes sense for YOU!

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