Joel Libava
Yes. Franchise startup costs are starting to get too high. But why?
Is inflation to blame?
Are franchise ownership startup costs becoming higher because there’s so much interest in franchising? Or is it something else?
Spoiler alert! It’s something else.
The Reason Franchise Startup Costs Are Getting Higher
Franchisors are paying more for everything.
Things like website hosting, online marketing, keeping the lights on at headquarters, and a myriad of other business-related items do cost more these days. And some of these costs are passed down to franchisees in one way or another.
But the truth is, there’s one cost…one out of all the costs associated with operating a franchise business, that continues to get higher. And it has absolutely nothing to do with inflation.
It’s the franchise fee.
The “fee” that gets the ball rolling once a franchisee signs her franchise contract.
Here are a few things you need to know about the contract.
But why are new franchisees forking out more of their hard-earned money for the initial franchise fee?
Because of…
FSO’s
I frequently bring up franchise business topics that others in my industry don’t. Or won’t. Why?
Because there are several under-the-radar things that the majority of today’s aspiring franchise owners need to know. Why?
Because they’re putting a good chunk of their money at risk to go after their dreams and goals.
In view of that, one of things they (you) need to know is (in some cases), franchise fees are outrageously high. This is especially true with younger franchise concepts.
I’m referring to newer franchisors who have decided to outsource their franchise sales to outside sales companies.
Known as Franchise Sales Organizations (FSO’s), these companies sell franchises. And the salespeople who work for them are 100% commission based.
And not only does that put pressure on them to sell, it does something else.
Who Pays The Franchise Sales Commissions?
Should I tell you how much FSO’s get paid for a successful new franchise sale?
Yes!
But I’m going to share those figures in a somewhat stealthy way.
Junk Pirates!
Fred and Doug felt they had something special.
They knew that to compete with the big names in junk removal, they would need to bring something to the table that was special. Different. So they did.
$150,000 later, they had a franchise opportunity to offer. And they made it official in February of 2021. Junk Pirates!*
*Not a real franchise business.
By July, they had sold their 1st franchise to an already successful businessman in Pittsburgh. He opened Junk Pirates of Pittsburgh in November, and quickly started producing revenue.
In their 2nd year of franchising, Junk Pirates sold two new franchises. That brought their total number of franchises to 3. A number that wasn’t in their plans. And they were starting to get worried.
Here’s what happened next.
Spectrum Franchise Sales
Early on, it was recommended that Fred and Doug join the IFA. They did. And that’s where they learned about FSO’s.
So in January of 2022, they contacted Scott Delaney, the head of Spectrum Franchise Sales.* They met him at the IFA convention, and he seemed to know what he was talking about. They hired him.
*I made that name up.
Scott quickly told Fred and Doug to raise their franchise fee, from $30,000 to $45,000.
Fred and Doug weren’t in a good place.
Translation: they weren’t feeling too confident about their franchise concept. And with only 3 franchises sold, why should they?
In any event, they decided to listen to Scott’s (not very subtle) suggestion, and had their franchise lawyer increase the franchise fee in time for the new* FDD to be published.
*Federal law requires franchisors to update their franchise disclosure documents (“FDD”) within 120 days after their fiscal year end (“FYE”). State registrations must also be renewed annually. – From the JD Supra Law site.
Wait. You do know why the franchise fee was raised, correct?
To pay the outside salesperson $15,000 for each successful sale of a new franchise.
No other reason.
3 Things Can Happen
When FSO’s get involved with young franchisors, 3 things can happen.
- Lots of new franchises get sold, and the franchisor hires enough employees and adds the infrastructure needed to support all the new franchisees.
- Lots of new franchises are sold, but the franchisor does a horrible job of supporting them because not enough employees were hired, and their internal systems weren’t ramped up enough to handle all of the new franchisees.
- Barely any new franchises were sold, because the system was too new, and prospective buyers didn’t feel the $45,000 franchise fee was worth what they may get in return.
One more thing.
I’ve heard this from my clients…for the past couple of years.
These outside salespeople are extremely aggressive.
I can’t imagine why.
Should Franchise Fees Be Raised To Increase New Franchise Sales?
If you’re a new franchisor, struggling to sell franchises, is hiring an outside franchise sales company the way to go? Maybe.
But your franchise concept had better be special.
And you better have the money to hire more employees to support lots of new franchisees and add what’s needed to your infrastructure.
Because if you don’t, your growth can actually happen so fast, your company crashes and burns. You can get sued by franchisees who never opened. One more thing. This is a tip for people looking to buy a franchise.
If you’re looking at newer franchises, and the franchise fee is approaching $50,000 or more, ask the franchisor why it’s so darn high.
Then ask the existing franchisees if it’s worth the cost of entry.
Before you sign anything.
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