Franchising Explosive Profits
Franchising is well known for high margins, predictable revenue, and rapid growth. As a franchisor, how do you make money and what sort of profits are to be expected?
Franchising produces revenue through two main vehicles: franchise fees and royalties. Franchise fees are not viewed as a significant profit center but instead act as an immediate cost recovery vehicle. Franchise Fees offset a franchisor’s initial expenses for marketing, training, support and other costs until a franchisee’s royalty payments surpass the costs for ongoing support.
Product sales, technology sales and supplier kick backs all contribute additional revenue to your franchise, but royalties are the lifeblood of franchise system profitability. Many franchisors experience over 50 percent profit in their royalties making it one of the most lucrative methods of expansion. The high margin in royalties comes from the minimal expense in support and training compared to the number of units paying royalties into the system.
For example, if you have 20 franchisees, you may only require a single field support person to service them. Assuming an industry average of 6% royalties and $500,000 gross sales per franchisee, the franchisor generates $30,000 per year per unit or $600,000 per year. With a minimal staff of leadership, field support, marketing, sales and accounting, much of which can be outsourced, a franchisor can keep costs to a minimum as the franchise system expands. Additionally, many of these individuals can take on more responsibilities as the franchise grows increasing profitability while continuing to limit expenses.
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The issue of profitability is one of the many topics of Francorp’s online “How to Franchise Your Business” seminar that is available FREE when you mention this newsletter ($195 value). To learn more about franchising, visit http://www.francorp.com or call 800-372-6244. As a reader of this newsletter, to sign up for your FREE seminar ($195 value) or take the FREE franchise quiz, click the buttons on the left for direct access.