Over at the BlueMauMau blog, there was a post about Huddle House discounting their upfront franchise fee from the magical $25,000 to $5,000 and waiving the royalty for the first five months. Some comments frowned upon franchisors who discount franchise fees. Here my opinion:
Count me as one who loves to see franchisors discount their fees as done by Huddle House. The goal of the franchisee should be to get the highest likely return on invested capital for their risk profile. My point is that franchisors should be more willing to base their fees on market demand like all other services.
Nearly all industries (and even financial instruments liked bonds) fluctuate their pricing based on many internal and external factors, particularly balancing prices with demand. Selling franchises should be no different.
Support suffers to the point of reduced sales for the franchisee if fee are discounted? Perhaps in some instances, but it is the exception rather than the rule. Per franchisee support expenses between can vary tremendously between franchisors, and the use of technology and other efficiencies can dramatically reduce support expenses. Maybe the franchisor’s fees were too high to begin with and now they are drifting in line?
A few commenters missed the point and disagreed, arguing that reduced fees makes it almost certain you’ll earn lower returns. My response:
Come on – I wasn’t suggesting investors focus on year one returns, nor was I suggesting you ignore non-financial issues. I am suggesting that a franchisor reducing upfront and ongoing fees often can, but not always, make the investment more attractive.
Projecting your return on invested capital is based on the entire expected life of the investment. After you review your expected return on invested capital, then you consider and adjust for intangible factors such as franchisor quality, location, levels of controllable and non-controllable expenses, desired income and investment return given the risk, alternative investments, and so forth.
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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 312-715-8115.
Ryan, I agree with you after reading your article. When I invest in mutual funds through my 401k I always look at the fees. When I shop I price shop. Getting a deal on a franchise? What the hell is wrong with that?
Can’t say I see this as a negative. Here is a reality. A franchise represents to the zor a series of future cashflow’s, and while unpredictable the zor retains control over his expenditures going forward, therefore he can insure those cashflow’s are a net positive; it is under his control and business acumen. Cut to the zee side, interviews with zees repeatedly reveal that they see little on going benefit from most franchise organizations and feel the benefit came primarily in the first year or two of operations. The general sentient is that the zor should increase upfront fees and minimize ongoing fees from the zee point of view. Instinctively that should let a zor know that the money is in the long terms royalties collected. Lowering the up front fees should induce more zees into the system to the zors benefit.
I really see this as win-win. If the zor is confident they have system in place that is replicable then they should have a horse in the race in the form of eating the upfront training cost to a great extent, in exchange they get a nice cashflow for the duration of the FA. This seems far more preferable to the situation you see today where many zors are living off the sales of franchises and have no true stake in the on-going profitability of their zees nor the replicability of the system.
FuwaFuwaUsagi
Btw Ryan,you will get those types of comments if you frequent sites run by orange, near-sighted fish – LOL.
FuwaFuwaUsagi