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Argument #1 Franchise Fee: It’s Too Much Money!

For the last 30 years I’ve asked my audiences (mostly prospective franchisees, i.e. people who plan to buy a franchise) the same question: “What’s wrong with franchising?” And through the years thousands of people have told me that the Franchise Fee is too expensive. Today I’m starting a series of arguments about the Franchise Fee. From time to time I’ll update this topic. Look for other argument series about other topics in this blog. 

Typical Franchise Fees

Franchise fees typically range from $10,000 (rarely less) to $50,000 (sometimes more) and they are paid in a lump sum to the franchisor at the time of signing the franchise agreement. Prospective franchises often complain that the fee is too expensive. From the get go I’ll agree: Some franchise companies charge inflated franchise fees and you should avoid them. But most of the franchisors I’ve assisted through the years — especially the most credible franchisors — require very reasonable franchise fees. In fact, many franchisors should increase their fees, but they’re afraid to because they would exceed the typical range.

Before you come to any conclusions about the amount of the franchise fee, I encourage you to consider several points of view, as well as the facts surrounding franchise fees. And rather than tell you everything that’s important to know about franchise fees in one article, I’m going to share my ideas one at a time. Over a period of time I’ll write a dozen, maybe more, “arguments” about the franchise fee and after you’ve read them you may see things the way I do.

No Franchises Sold Here!

By the way, it’s never my intention to get you to agree with me so that you will buy a franchise. Whether you buy a franchise or not matters not to me — at least not financially. I don’t sell franchises. That separates me from most of the people who write franchise blogs. Of course, it would matter to me if you bought a franchise and you were not a good fit for franchising, or if you passed on buying a franchise because you didn’t understand something relative to franchising. I’m an educator first and foremost, and I do not get paid for convincing people to buy franchises. I get paid for speaking, training, coaching, and writing books (sometimes articles) that provide honest, credible and objective information about franchising so that my audiences can make informed and wise decisions.

So when a prospective franchisee says the franchise fee is too much money, I want to know: Compared to what?

Sometimes the prospect will say, “Compared to what it would cost me to start the same kind of business on my own.” Fair enough. In fact, many franchisors started their original business for less than they now charge for the franchise fee. One of my books includes stories about numerous franchisors (i.e. Two Men & A Truck, Little Caesar’s Pizza, Jani King, etc.) that started their businesses for less than $10,000.

Keep Comparisons Fair

But franchisors are not selling a “similar” kind of business. Franchisors are selling a specific brand identity, with a brand promise (that may or may not be valuable), plus training and support, and an operating plan for developing a successful business. Yes, you could start a pizza or cookie or plumbing business, etc. for a small amount of money — probably less than $10,000 even today — but it won’t be part of a franchise network and it won’t come with the intellectual property already explored, tested and certified.

Don’t confuse starting a business from scratch from buying a franchise business that comes with bells and whistles. To get your own bells and whistles you’ll need to do a lot of huffing and puffing, and possibly spend several hundred thousands of dollars (or more) as you test your ideas and figure out how to make your business prosper. Maybe it makes sense to pay a fee to learn from someone else’s huffing and puffing. It’s an expensive proposition to develop your own concept. On the other hand, you might develop the next McDonald’s!

 


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8 thoughts on “

Argument #1 Franchise Fee: It’s Too Much Money!

  1. Sudha

    It is good to see you admit that some franchise fees are inflated. You have a balanced view that is refreshing. I was thinking the same, that it may be worth it for me to make a profit sooner with a brand that is already recognized and has systems that have already been tested in the market. I am still considering starting from scratch, because the dream of building something of my own is appealing. But it could be years before I have profit coming in. So in my case, I do think that time is money. Thank you, and I look forward to more articles.

  2. T. Davis

    I can see paying a fair price for “bells and whistles” that someone else spent years developing, but just in the preliminary research I’ve done some of the fees are just jaw-dropping. After I pay the fee, it’s not like all the work is already done, because all I’ve really bought is the rights to the brand. I still have to keep putting out money for all the assets I would have if I started a business myself, plus royalties. I kind of want the time saving and convenience of buying the franchise, but I don’t know if I can justify paying these huge fees. How would I even know if a fee was really fair? It seems like most of them are really inflated.

  3. Mary Sherman

    Hi John, weren’t you CEO of HomeVestors? I had been considering a HomeVestors franchise, but then they lowered their franchise fee. I hope I’m not being too forward, and I understand if you can only answer this in general terms. Why would any franchiser do that? Was it just too high in the first place or could there have been something else going on? Maybe it’s just my real estate background but I’m always cautious about a “sale” price and looking for the reason behind it. Thanks!

  4. J McP

    For me it is a combination of things. You pay the Fee, the ongoing monthly royalties… but still in a lot of cases the Franchiser still retains so much control. Insisting on certain “specials” and pricing, even if it is not right for your area or having to still purchase supplies from them, even if you could get them cheaper either locally or from just another vendor. In some cases it seems like you are more a manager of a Corp owned store instead of having your own business even though you shelled out all that money (and continue to do so with the Royalty Fees).

  5. johnhayes Post author

    Control! That’s the #1 complaint about franchising from the people who attend The A to Zs of Buying a Franchise. In America, especially, people want to maintain their independence. J, in the near future I will add an Argument series about Control. Yes, the franchisor will always be in control. Depending on your personality type, that may or may not be a good thing for you (and that’s important to know BEFORE you buy a franchise — what is your personality type?). You are correct that in some cases you are more of a manager than an owner — actually, many franchisees are okay with that because at the end of it all they can sell the business (can you do that with a job?). Franchisors make a huge mistake when they sell products to franchisees for more than the franchisees could buy the same product (but is it the same product quality wise?) elsewhere. They also should know each franchisee’s area and make modifications as necessary. By the way, good franchisors do all of this so it’s a matter of continuing your search for a franchise. Not all franchisors are created equal – some are better than others!

  6. johnhayes Post author

    Sudha, you are asking one of the tough questions that many would-be franchisees must ask and answer before deciding to buy or not buy a franchise. Would you be better off becoming a franchisee and perhaps earning profits sooner, or better off starting your own business from scratch (and owning it, possibly, 100%). To answer that question accurately (possibly comfortably) you really need to know your behavioral style. Are you entrepreneurial? Do you resist control? Willing to take risks? Capable of getting many things done yourself if necessary (not necessarily a good quality, by the way!)?

    So your question isn’t one that should be answered first and foremost in terms of buy a franchise or not buy a franchise. Your question addresses a different issue — YOU! What are YOU capable of doing? . . . For many people, starting on their own is not a realistic option and unfortunately many discover that when it’s too late — they’re bankrupt or in debt headed for bankruptcy. Other people do have the ability to start on their own — not only the money, but the drive and insights to get it done. This is not easy to do by any means — if it were, we’d have more franchisors!

    We have a lot of people who like to second guess franchisors, and many who think they can do a better job than existing franchisors, but when it comes right down to proving a point, there are fewer people who can start a business from scratch and succeed than there are people who can buy into someone else’s idea and succeed. And that’s another way of arguing in favor of a franchise fee.

    Imagine if you did start from scratch — my franchise clients invested at least hundreds of thousands of dollars over several years to build and improve (not necessarily perfect) their operating system (and if there’s no system, there’s no viable franchise). Most franchisors will invest millions of dollars to “perfect” the system and roll it out as a franchise (you still have to convince someone to buy one of your franchises). Let’s say you invested a million bucks in your concept and now you want to franchise it — you built your system by trial and error. You know what to do and what not to do. And by the way, by knowing what to do and what to avoid you can save a franchisee tens of thousands — maybe hundreds of thousands — of dollars. In fact, by knowing what to do and what to avoid you can save a franchisee from failure. So what’s that worth? Are you willing to license a franchisee for a few thousand dollars, or do you think it’s reasonable to charge more, maybe $30,000? You would like to recover some of your investment, wouldn’t you? Or perhaps you’re willing to forego recovery of the investment for now and just charge enough to provide initial training and support for your franchisees, plus cover any costs of recruiting franchisees. When you add up the latter, you’re going to easily find yourself in the $25,000 to $50,000+ range! But, Sudha, it comes down to what’s best for you?

  7. johnhayes Post author

    Okay, T, I agree with much of what you’ve said. You are absolutely right that the franchise fee merely entitles you to “rights” to the brand. You’ve still got to do the work, and you’ve got to invest additional money (for example, to build out your unit, to buy supplies, to hire staff, etc.) And sure, you’re always going to pay royalties, but at least they are a percentage of your gross revenues. (Soon I’ll post an Argument series for Royalties). . . . You ask a thoughtful question: How would I even know if a fee was really fair? . . . There’s no clear answer to that. You add that it seems many are inflated and I already said in my article that they are — but you can (through your homework) identify them and avoid them. A good approach to deciding the “fair” question would be to think about your expectations and think about how paying the fee provides properties that satisfy your expectations. Here’s one idea. A franchisor is going to train you to operate a business that most likely you do not know how to operate (until you go through training). What’s that worth? What if you didn’t have a franchisor to train you? What if you had to learn, via trial and error (in other words, you’re spending money and by trial and error most of it will be lost) how to operate the business successfully? Do you think there’d ever be a day or a time when you would say, “I just wish I could pay someone to tell me the answers before I invest more money and lose it”? A franchisor can be a great coach and guide — so what’s that worth? I know people who speed tens of thousands of dollars to attend a weekend seminar because they want to learn how to do something (set goals, buy real estate, invest financially, etc.) successfully. What’s it worth to get a franchisor to share the formula for success with you before you invest money to figure it out for yourself?

  8. johnhayes Post author

    Hello Mary. Indeed I was the CEO of HomeVestors, the “We Buy Ugly Houses” people, and I enjoyed it immensely, but that was during the real estate boom and at a time when it was easy for people to buy houses. Everything changed beginning in the summer of 2007 when sub-prime lending ended — this was the beginning of the end of a fabulous real estate market. At the time, HomeVestors made a lot of sense because there were people who desperately needed to sell a house (there still are!) and there were people with the means to buy a house (now not as many, but it’s getting better). As I recall (and I was a franchisee before becoming CEO) the franchise fee was in the $40,000 range — the founder of the company (whom I succeeded upon his death) thought it should be in the $70,000 range because the system, at the time, was powerful. Lots of people know how to buy houses at a discount — we had tremendous competition and many of those people are still buying houses today. There are weekend training programs to teach people how to buy houses. At the time, leads were scarce — leads of people who wanted to sell a house. That was the first advantage of HomeVestors — our advertising generated 250,000 phone calls a year which resulted in leads for our network of about 250 franchisees. The lead flow alone could justify the cost of the franchise. But then we did something else that was of great value (and it was how we earned our money) — we loaned money to our franchisees to buy houses! The combination of leads and money was a tremendous value — add to that our training and support, which was superb, and you had an outstanding franchise. We were the only franchise of its kind for many years. But then the market toppled, the company was sold to someone who had different ideas about how to operate it, and the value proposition changed. It was no longer a struggle to get leads from people who needed to sell a house! And after the company’ss ale, there was no longer a huge fund of money that could be loaned to franchisees. How do you justify a big franchise fee in that situation? You ask if the fee was too high in the first place — no, it was worth every dollar and many of our franchisees at the time who now continue to operate independently will back me up. After the company was sold there was a plan to sell a hybrid franchise for a much smaller fee. A prospective franchisee would need to look at the opportunity and evaluate it to determine if the new fee and scheme makes sense. I hope that helps.

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