franchise fees are not the reason to franchise

In my opinion, the temptation to prematurely or undeservingly develop a franchise is largely caused by one flaw in thinking. Put simply, that making money in franchising is just about selling franchises. When consulting my company’s prospects, I am quick to point out that selling franchises and the revenue received from the initial franchise fees is a zero-sum game. In the end, the costs and responsibilities put on a Franchisor are extensive, and the franchise fees, although significant, generally only provide marginal profit to the Franchisor executing the start-up tasks and other requirements necessary to assist a new owner in the establishment of a franchise location.

Franchise profits, the kind of profits that make franchising a financial windfall for the owner(s), are derived from an annuity stream of on-going franchise royalty payments generated by your Franchisees’ success. There is simply no substitution for profitability in a franchise model. Without a long-term cash flow source, a Franchisor will quickly find they are short on capital following a hopeful franchise unit sales run-up. As with any business, franchises experience growth plateaus and maturity points, and franchises need constant royalty cash flow to survive and prosper. The failure of a franchise to provide its units with a quality product or service that is in high demand and will steadily generate royalties, will ultimately mean failure for a franchise network and the Franchisor.

So, if your business sounds more like the Catfish Purveyor, then it is likely franchising can provide you with the means to accomplish significant growth and substantial profits. On the other hand, if your business is new, unproven or now struggling, it is wise to develop an action plan and consider franchising at a later date, or consider another means for expanding your business.

To help decide, you are not alone. I have prepared the next chapter specially to provide a detailed discussion to help you determine the best expansion method for your business today.