In 2022, it was estimated that there were 792,000 franchise establishments with an economic output of US$827 billion and employing 8.5 million people. Interestingly, over US$ 276 billion came from fast food service restaurants. We are past the uncertainties of the pandemic but inflation is setting in.
How is your restaurant franchise doing today? Is your restaurant franchise thriving or sinking? Possibly, you are not reaching your sales and customer experience goals for some reason. That’s when you look at your balance sheet and realize you may have wanted some support from your franchisees. Can charging your franchisees the right fees make a difference to the brand’s revenue? We think it can, if the franchisee is ready to pay and if it benefits the brand as well. Beginning with initial setup fees and ending with technology fees, there are four types of fees that the franchisor can levy on the franchisee.
For each fee type, we will also advise how best to optimize the earnings from it to drive growth for your restaurant franchise business. But before we do that, let's take a look at two important ways to assess if the franchisee will work for you, because only then will they be able to grow and you will be able to grow with them.
Liquidity: How much fluid assets does your franchisee have? This is very important as it will help tide over any uncertainties faced by the brand or by the specific outlet during the first year of operation.
Net worth: Is the franchisee stable enough to take the undertaking? This is a measure of the long-term success gained by the franchisee, and if that will directly benefit your brand and business.
Now that the franchisee is declared eligible to operate your restaurant franchise outlet, you can focus on the fees and how best to use them to increase your business growth.
Franchisee registration fees
Before you become a restaurant franchise, you must pay the initial fees for registration and setting up the franchise. Franchisors sometimes set these fees quite high and sometimes relatively low. Pizza Hut, for instance, charges about US$25,000 as initial fees to open a franchise. A lower initial cost is favored by franchisees who cannot afford the cost of setting things up, as they may have other fringe expenses they may have planned for. If the revenue generated is quite sizable compared to the cost incurred, it can tempt franchisees to pay higher.
And they pay for good reason too. The restaurants that set a higher initial cost for a franchisee typically offer more value to them. This comes as higher revenue from each owned franchise. Another point to note, if your franchise uses a broker to acquire a franchisee, then the commission for the broker must also be built into the initial franchise fees.
Sometimes a fee is charged over and above the initial costs of setting up a franchisee outlet for a restaurant. This royalty fee is a percentage of the revenue generated by the franchisee, or a fixed amount levied by the franchisor. It is to be paid monthly or quarterly as per an agreed-upon contract between the franchisor and the franchisee. This contract is often referred to as a franchise disclosure document. The goal is not to increase the royalty fee levied on a franchisee but to reinvest the dollars collected from other fees in growth initiatives. Many businesses collect royalty fees but go wrong by spending them on growth initiatives. Set aside the royalty fees and accumulate them over time in a deposit that you could later break if you need to make a large one-time payment to support your business.
Charging franchisees of your restaurant brand a national or local marketing fee to promote it further is a brilliant idea. Sometimes it’s difficult to market a product well enough on a limited budget. And if a new competitor is performing well in the market, your restaurant franchise will need all the support it can get. Most brands are aware of such a possibility and charge a national advertising fee. The majority of those brand charge a percentage of the sales, while very few charge a fixed monthly amount. McDonald's charges about 4% of the gross sales as fees towards advertising and promotion.
Across verticals, the national advertising fee is about 2% of the monthly revenue generated. Many brands maintain that the marketing fees they charge are not enough to gain a foothold in the market or to keep their position secure. At the same time, one must also remember that while it is great to use the marketing fees to drive popularity for your brand, ensure that you do not overcharge the franchisee in the process. Opt for a middle ground that serves your marketing demands well and at the same time remains fair to the franchisee too.
Some franchisors require franchisees to pay a technology fee that covers the software and hardware licenses for the products that are used to run the franchise. For instance, Mcdonald's charges each outlet about US$275 annually for the McDelivery POS integration. At times, you can choose to waive these technology fees and decide not to invest in certain technology, but this may not be a good idea. This is because most franchisees think otherwise.
Half of all franchisees say technology tools are among the best value franchisors can offer. And if you are offering technology that is making a crucial difference to sales and brand recall, then you can charge a good sum for it. A case in point is smart point-of-sale offerings that track customer orders over time and make smart personalized recommendations that customers just can’t say no to. According to Forbes, about 72% of all customers respond to only personalized messaging. This can drive higher order values and speed up the checkout process as well. But to bring such technology into your franchise, you would need to levy a technology fee on every franchisee. But make it a point to carefully explain the benefits of the technology so that you do not scare away franchisees either.
Technology has another advantage as well - the progress you gain from it is measurable too in most cases. This means that you would have KPIs that directly show the impact of technology on your revenue generation. You could then use these metrics to bring in customers who may be on the fence as well.
It is all well and good to charge your franchisees fees to sustain the brand, as long as the brand itself is helping the franchisees succeed in their endeavors. When there is an over-dependence of the franchisor on a few franchisees or for a franchisee on the franchisor, things are not looking up for your business. As a franchisor, you must remember that the startup costs for a franchisee on average is about as much as US$150,000. You may need to compromise on certain fees if you think that will work well for you.
Remember that while reducing royalty fees may not set you back, reducing the marketing or technology fees will most certainly put your brand on the back foot and might even help the competition. Make the right choices and opt for the right trade-offs. We wish your restaurant franchise the best of luck and we hope this article helped you understand the various fees and how best to charge them to grow your franchise.