NFA Franchise Consultants

Successful Franchising Program

Keys to A Successful Franchising Program: Will Yours Make Enough Money?

Reflections of a Franchise Consultant : Successful Franchising Program Tips

Stephen S. Raines
President, National Franchise Associates
Atlanta-based Franchise Consultants

In my over three decades of experience as a franchise consultant, I am often asked “What makes one company a successful franchising entity while another fails?  Rarely is there a single reason for successful franchising versus franchising failure.  Here, I will examine some of the many factors that can help a Franchisor put together a successful franchising program.

When putting together a successful franchising program, it is extremely important for a new Franchisor to carefully consider all potential revenue streams.  To be a successful franchising company, the new Franchisor must earn enough money to fund its service programs for Franchisees, finance the next stage of growth and earn a reasonable profit.

There are a number of potential income streams for a successful franchising company. Virtually all Franchisors charge an initial franchise fee and an on-going service fee or royalty. Additional sources of revenue include sales of products, equipment or services to Franchisees, possible financing programs and revenues from site development/potential real estate deals.

With successful franchising programs, the initial franchise fee covers at least the costs of marketing for the individual franchise as well as the Franchisor’s costs for training the new Franchisee and any other pre-opening Franchisor responsibilities. These responsibilities may include approving the proposed site and periodically visiting the franchise to review its progress towards opening. Determining the ideal initial franchise fee requires research into those charged by existing competitors, estimates of the Franchisor’s costs in getting the new franchise sold and open, the Franchisee’s initial investment, the Franchisee’s potential income and other factors.

At the outset of a successful franchising program, the owners of the Franchisor can usually handle franchise sales, helping to set up the new location and training for the first few franchise locations. Managers may help provide the initial Franchisee training, but as these are part-time additional responsibilities, any salaries are paid by the parent company. Therefore, the successful franchising company’s expenses are quite low.

For most successful franchising companies – particularly new Franchisors – the service fee or royalty is by far the most lucrative reason to franchise. It is either a percentage of gross revenues or a flat weekly or monthly fee. In many successful franchising programs, the percentage ranges from 4 to 8% of the Franchisee’s gross revenues. The royalty or service fee must generate enough money to cover the Franchisor’s costs of providing on-going services to Franchisees as well as a reasonable profit.

Depending upon the nature of the business, a successful franchising company can also earn substantial profits from the sales of proprietary goods and services to Franchisees. Many successful franchising businesses are based upon a distinguishing product or service – such as the famous “11 herbs and spices” or “31 flavors”. In some successful franchising service businesses, most of the services a Franchisee markets are actually fulfilled by the Franchisor – for a fee.