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How does a franchisor determine the cost of a franchise?
There are a number of elements to the cost of a franchise. First there is the initial fee a franchisee pays, which will be for initial training, usually the provision of some stock and stationery, a marketing launch and so on. Then there will be continuing fees. Normally the management fee and the marketing fee are approximately 10 per cent of a franchisee’s turnover, although this percentage ought to be reduced if the franchisor obliges franchisees to purchase products or services from it or a nominated supplier and receives commissions, discounts or retains a mark-up.As to the initial fee, it is generally considered to be good practice for franchisors not to make a profit from it because otherwise there is a danger the franchisor’s business becomes focused on the sale of franchises. The other guiding principle is that the amount of the initial fee should bear some relationship to the likely profits a franchisee is going to obtain, so there isn’t much point in the franchisor charging an initial fee of £100,000 if franchisees will only make £10,000 a year from the operation of the franchise.What franchisors have to do is calculate all their costs, not only those relating to initial training, supply of stock and so on, but also the cost of recruitment. Recruiting franchisees and going through the process of ensuring they are the right people for a particular franchise is expensive. Many franchisors calculate this element to be over £5,000. The initial fee should reimburse the franchisor all these costs.
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