Revenue streams allow businesses to earn better profits from multiple sources. During franchise strategy development, plan on building various revenue streams that ensure you have a steady cash flow instead of relying on a single revenue stream.
You need to do your homework on what the industry average is in that market segment when it comes to franchise fees, royalties, advertising funds and local advertising investments. However, you also need to be cautious and not overburden the franchisee with these so that he makes a solid profit and is motivated to grow the business long term.
These fees are not something you want to change often unless something dramatic changes that make you feel like you should reconsider the fees in place to keep it fair for both parties in a franchise agreement. Keep in mind, that changing any of these fees requires considerable franchisee notification and explanation, and should not be taken lightly.
Common Franchise Revenue Streams Options
Franchise revenue streams will generate your initial and ongoing income. You can divide the fee structure and build multiple revenue streams in the franchise development process. You should consider each stream as financial support that continues to grow your business while expanding it to new geographies.
Here are some common but diverse revenue stream ideas while franchising your business:
- Initial Franchise Fee
- Royalty Fees
- Supply Chain Mark-Ups
- Advertising Fees
1. Initial Franchise Fee
One of the most common revenue streams is taking initial franchise fees from the franchisee. After signing the franchise agreement and paying the franchise fees, you will shift your rights to the franchisee and allow them to sell your products and services under your brand name.
The average initial franchise fee ranges from $20,000 to $50,000. The franchise fee is a one-time payment and most investors are aware of this when they start considering franchises to acquire.
2. Royalty Fees
Your franchisee has to pay you the royalties on a weekly, bi-weekly or monthly basis, depending on the terms of the franchise agreement. You create the general payment structure of the royalty fees, either stipulating a percentage of gross sales or charging a flat-rate fee.
Create your royalty fee payment structure after assessing the market of your industry within the franchise geography. Moreover, consider the deal value and length of term to ensure you derive ample profits through the royalty fees without making the franchise look any less attractive as an investment.
3. Supply Chain Mark-Ups
The vendors your business works with can pay you a percentage of the total amount of purchases made by your franchises. This profit is called supply chain mark-up or rebates. To set up this revenue stream, you need to disclose the vendors on Franchise Disclosure Document (FDD) and how much rebate you will receive annually.
You and the franchisee are equally responsible for the franchise’s success. Therefore, don’t partner with vendors that sell highly expensive products. You might receive a high annual rebate but the franchisee will struggle to make the payment to vendors. It’s simply better to choose vendors that supply quality products at affordable prices.
4. Advertising Fees
In the advertising fee revenue system, the franchisee must pay you a specific amount of money to promote and market the brand. The advertising fee is a set percentage of gross sales and is calculated bi-weekly or monthly.
You should keep the advertising fee management separate from royalties and other revenue streams because it is not part of your income. The advertising funds are provided “in trust” to market the brand on different platforms.
Every revenue stream you plan during your franchise strategy development should ideally bring long-term value to you and the franchisee. It should also be easy to execute and should not put a financial strain on your franchisee(s). You can invest the profits coming from cost structure and revenue streams at the core of your business to provide support to your franchises to make your business more sustainable and poised for future growth.
At FMS Franchise, our franchising and marketing specialists help franchisers by streamlining the process and assisting them throughout the process. Get in touch right and start to close your first franchise deal.