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.