Franchisors can make money off their franchisees in several ways:
- Upfront Franchise fees
- Monthly royalties on gross revenue
- Deposits on equipment
- Ongoing “hidden” cut on the mark-up of equipment, products, services, extra training and support, and supplies (many use Vistar Corp as a distributor)
- Advertising, art and signage fees
- Kickbacks and commissions for real estate deals (from landlords and brokers)
- Kickbacks from financial lenders (similar to finder’s fees)
Usually the skimming is minimal and is serves the purpose of offsetting lower upfront costs for the franchisee. But, many of these extra “fees” and “commissions” earned by the franchisor are not disclosed and purposely obfuscated during sales process. Too often franchisees do not have enough accurate information to estimate these.
Also, franchisors often do not disclose the total related expenses and costs of a full site build out. They know that once you paid the upfront franchise fee, you will make the extra investments needed to get your building up to par and ready.
Franchisors also make nice profits on the resale of franchises. Franchisees who want out can’t just sell their franchises to their neighbor. Usually there are breakup fees and all sort of other hoops the corporate headquarters will impose on the seller.
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Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
They can also get you with late fees (sounds like Blockbuster, eh?) if you are one day late paying a fee or royalty.
Can the franchisor fine you if they stop by your business and something is in their opinion not aligned with their manual on operations?
I think the national advertising fees are bullshit. They should be paid into a pool control by the franchisees and allocated to local media buys prorated based on a function of number of franchisees and sales. Franchisees should see a full accounting of spending of the advertising fees.
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