Explained: Franchisor Mark Ups

Brian Duckett writes:

It’s possible they do, not least because in some cases the franchisor is the manufacturer or wholesaler of bespoke, branded items and makes its profit from such mark-ups, rather than management services fees.

What matters is that however franchisors earn from their franchisees the overall level of fees is fair. It’s also possible that items purchased from a franchisor’s nominated or approved supplier will include a kickback or retrospective discount, which will be paid direct to the franchisor.

There’s nothing wrong with such arrangements, but it’s good practice that they should be transparent and notified to the franchisees. Indeed, the British Franchise Association believes that to keep such practices secret is unethical on the part of the franchisor and any adviser who suggests it does so.

Some franchisors use the funds generated for a specific purpose, such as subsidising the annual conference or contributing to the cost of the staff member who’s responsible for negotiations with suppliers.

In other examples, the total discount negotiated by the franchisor for its network may be sufficiently high that it can be split between itself and the franchisees, so that both parties benefit.

Brian Duckett is chairman of The Franchising Centre, part of the world’s largest network of specialist franchise consultants.