When I purchased Monkey Bizness Franchising in December 2015, I thought I was only purchasing a business that franchised indoor active kids play centers. Little did I know the number of friends I was acquiring with the business……after buying a business, everyone wants to be your friend. There is no shortage of people that want to tell you how to run aspects of your business. In the franchising world, there is no one that wants to be your friend more than franchise sales professionals.
This article won’t go into some of the ethical concerns I have around how some franchises or third-party consultants are selling franchises. This article isn’t meant to give young franchisors the answer on how to sell their concept and system. Every system is unique and every owner has a different skill set. As such, there is no one size fits all approach.
As the President of a franchising company and someone who also does outsourced CFO and Controller work, I am in a unique position to talk about the cost structure as it relates to growing a franchise business. When I purchased Monkey Bizness, it was a system that had 4 current franchisees. I purchased it with the goal of modest growth. I never wanted to be a system that was growing by 5-10+ units a year. Rather, I wanted to grow by 1 or 2 units every 1 or 2 years. I had other aspirations outside of Monkey Bizness (like consulting with other small business owners). However, with that in mind, I had to devise what my sales strategy was going to be.
Before we get into your different options, let’s walk through the initial franchise fee. One area I see franchisors struggling is how to determine what that fee should be.
Setting Up Your Initial Franchisee Fee
Typically, when you sell a franchise you collect an initial franchise fee. I say typically because you are starting to see more creative ways that young franchises are selling themselves (and I applaud this). The first mistake young franchisors make is believing that franchise fees should be a revenue stream. Read that line again because it is important…young franchises need to re-invest their initial franchise fees into their system.
I have asked many franchisors before how they set their initial fee and the response I often get is that they looked around at competitors and set their fees. What a way to stand out in the crowd!!! (heavy sarcasm)
I often tell franchisors they should build their fee from the ground up. When you sell a franchise, there is typically a lot of expenses associated with that. For instance, you must train the new franchisee which takes your or another employee’s time (don’t make the mistake of thinking your time is worth $0). There is typically travel expense as you will go to their location for some period of time around the opening. There is a legal expense with having your attorney complete and review the final franchise agreement. There is a sales expense which could take many different forms but think of it as a commission. You might have a third-party consultant you use to help manage the real estate process. You also need to recoup the marketing expenses you had to bring in this new franchise (you most likely went through 100’s of leads to get to this one).
None of these expenses include the additional amount you want to charge so that you can reinvest in systems and marketing for your franchise.
By the time you are done adding up the expenses, they should come pretty close to the initial franchise fee. This is where a CFO type of resource can help you. This is often not a straight forward calculation and having someone with the insight into the numbers and a franchising background can be extremely beneficial.
This is where a lot of franchisors look at me and say, “wait for a second, how am I supposed to make money?”. Successful franchisors make money off building a great system that is able to generate ongoing royalties. Royalties are how you make your money. Some franchise systems make money from selling services and products to their franchisees as well. When setup honestly and ethically, this can be a great profit center.
How do I sell my franchise?
While there are many different variations of the strategies I will talk about, there are typically three different ways you can sell your franchise system:
- Sell franchises yourself
- Hire someone to sell franchises
- Hire an outside salesperson to sell franchises
Selling Franchises Yourself
Most franchisors started off as business owners and as such, have had to try to sell something to someone. Most were successful at it because now they are ready to sell their idea, concept, and systems to others.
However, selling a franchise is hard. Starting a business will be one of the largest purchase most people make in their life. While some people might spend more on their house, when they are done, they have a house. With a house, someone has purchased something they can see, touch, and smell. With a business, they are buying a dream. I don’t know about you, but I often can’t see, touch, and smell my dreams. The point is, this is a tough sell.
Selling the franchise yourself is most likely the cheapest way to go. There is a school of thought that says no one knows the business better than you. While this is true, your knowledge doesn’t necessarily make you a good salesperson. Odds are if this is your first time through, it’s going to take a lot more leads to sell your business. And those leads cost money….
I have used a lead service before that sold me leads for $35 each (I don’t recommend going this route). Internally, I can generate leads through Facebook, Google Adwords, and LinkedIn for between $20 – $30 per lead. It is important to know how much your leads are costing you. You might also choose to advertise in a magazine or on a certain website. Those costs need to be considered when you are computing your costs per lead.
If it takes you 100 leads to generate a sale (not a ratio that is unheard of) and your leads cost you $25, it will on average take $2500 in marketing to generate a sale. I have heard of close ratios of anywhere between 0.3% to 5%. That close ratio will greatly impact the marketing costs it takes to generate a sale.
Hire Someone to Sell Franchises
If your not comfortable with franchise sales or you would prefer not to do it, one option would be to hire someone to do franchise sales for you. While it might seem daunting to hire someone with no or little revenue in your franchise company, it might be the quickest way of generating sales. The average salesperson will take 4-8 months to get up to speed. In other words, don’t expect a sale to happen right away. However, once they are up to speed, you should have expectations that this individual generate leads and close deals. A good salesperson won’t cost a dime.
Above we talked through a rough process of arriving at what your initial franchise fee should be. When you hire a salesperson, the cost of this person must be contemplated.
There are literally endless ways to compensate a salesperson. This article won’t get into all of those, but needless to say, you must take that compensation method into account when computing it in your initial franchise fee. This is not to say that the initial fee should cover all the expenses, but your plan and sales budget should consider all of these costs.
Outside Sales Person
I am not going to go into all of the considerations of using a third-party salesperson to sell your franchise. There are several non-financial considerations that a franchisor must contemplate when deciding if they want to use an outside person and which one to use.
However, from a financial standpoint, the decision is more straight forward. In most agreements I see, outside salespeople are compensated in one of two ways:
- A high percentage of commission on the sale (think 30%+). However, if no sale is made, they are not compensated.
- A monthly retainer fee for their services along with a commission on the sale. The commission is still pretty healthy but not as high as in above.
There are hybrid models of these two options, but generally, some combination of retainer and commission makes up the total compensation.
In most cases, the franchisor is still responsible for generating the leads and handing them over. While the commission might seem somewhat high, a franchisor must remember they are going to make money from building a strong royalty stream through healthy franchises. Whatever helps them get to that point is merely an investment.
All of these methods have positives and negatives. Some will help you accomplish your goals faster while alternatively, some will help you accomplish your goals with fewer costs. There is no one right answer for everyone. However, the underlying math, finance, and strategy that must be contemplated are too often skipped over by franchisors.
If the answer to why the initial franchisee fee is related to competitors, that it is the wrong answer. Inevitably, a prospective franchisee will one day ask you what is included in the initial franchise fee. The franchisor that has thought this out and knows exactly why their fee is what it is will be able to better articulate the value of the fee to their prospector franchisee. No matter what the math is, when prospects are being treated honestly and fairly, more sales will come.
Krieger Analytics works with franchisors to help them with their profits and grow through accounting, finance, and bookkeeping. We are not the perfect match for all franchisors so we have honest conversations upfront to see if we are a good match for you. Contact us now for a call to learn more about us and have a conversation about your business.