Regardless of your industry, having multiple revenue streams can benefit your business. For example, franchise owners can reduce risk by maximising cash flow from various sources. This article will take you through five different franchisor income streams.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Initial Franchisor Fees
The most convenient way a franchise system generates revenue is through franchise fees. These fees refer to an incoming franchisee’s initial purchase fee for a new franchise. Usually, the franchisor fee is payable when both parties sign the franchise agreement. Furthermore, it is payable in a lump sum. Usually, this fee will cover:
- basic training and support;
- access to intellectual property and marketing materials;
- advertising and recruitment costs; and
- location and lease negotiations.
Franchise fees vary drastically in price, starting from as little as $5,000 and increasing to as much as $1 million or more. However, the price of the franchise fee will differ depending on the brand in question.
Royalty Fees
In most franchise agreements, the franchisor will license the business’ intellectual property in exchange for ongoing royalty fees. These fees are typically calculated based on a percentage of the gross sales revenue. Although they can also be a fixed amount.
Most franchisors reinvest a significant portion of the royalties they earn into the maintenance and further development of the brand. This might include the:
- development of new products;
- investment in technology; or
- advertising campaigns.
Maintaining the brand through royalties is an essential component of franchises. This is because the brand awareness you get by buying a franchise is the primary reason to invest in a franchise. Without royalty payments, maintaining and growing this brand awareness would be difficult.
Continue reading this article below the formDistribution Fees
Distribution fees are another type of revenue stream for franchisors. These fees refer to the costs associated with the franchisee and any products they sell. For example, consider a coffee shop franchise. In that case, the franchisor might sell the coffee beans to the franchisee directly rather than having them purchase these coffee beans from a supplier.
These products often require the franchisee to prepare them before resale to customers.
Training Fees
The franchisor usually provides franchisee training at the start of the franchise agreement. This initial training period can range from a few hours of online training to months of training on-site. Although many franchises will provide initial training for free as part of the franchise fee, ongoing training or re-training might come at a cost.
A major downside to charging fees for this ongoing training is that it might deter franchisees from participating. Ongoing training programs are essential for the ongoing success of a franchise. This is because franchisees need to be updated on your franchise’s development as they add new tools and systems. Doing this will help your franchise run more smoothly. As such, charging training fees might not be an effective way to generate revenue.
Rebates
Another regular income stream for franchisors is rebates. A rebate is where the franchisor negotiates with a product or service supply company to name them the preferred supplier for the entire franchise network. In exchange, the franchisor receives a percentage of sales or a fixed amount per converted referral. Under such an agreement, the franchisee still pays less than they would on their own and the franchising company earns additional profits. This makes it a win-win for all parties involved.
Other Revenue Streams
In addition to the main revenue streams above, there are some less common ways for franchisors to generate revenue. For example, franchisors might provide equipment leasing to franchisees. Alternatively, a franchisor might charge a technology fee to ensure the entire franchise network has access to the most up-to-date technologies and systems.
Importantly, it would help if you took care when creating new revenue streams. You do not want to overwhelm franchisees or burden them financially, as this will only hurt your franchise network in the long run.
Key Takeaways
Regardless of your franchise’s industry, having multiple franchisor income streams allows your franchise to reduce risk by maximising cash flow from various sources. Some of the main income streams franchisors can have include:
- franchisor fees;
- royalty fees;
- distribution fees;
- training fees; and
- rebates.
If you need assistance diversifying your New Zealand franchise system’s revenue streams, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 447 119 or visit our membership page.
Frequently Asked Questions
Some of the main income streams franchisors can have include franchisor fees and royalty fees. Some less common revenue streams include distribution fees, training fees and rebates.
In most franchise agreements, the franchisor will license the business’ intellectual property in exchange for ongoing royalty fees. This ongoing payment is usually calculated based on a percentage of the gross sales revenue.
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