High growth, low risk
Article Date: Aug 23 2006
International franchisers need to consider the financial model that will underpin the relationship. There can be three elements: wholesale, where the franchise sells branded goods to the franchisees at a margin; licensing, whereby the franchisee pays an annual fee for the use of the brand, logos and signage; and commission, where the franchisee pays a percentage on all sales.
Variations on these themes will depend greatly on the individual preference of the franchiser. Some prefer straightforward arrangements whereby earnings come largely from wholesale margins, thus avoiding much accounting complexity.
Others prefer to incentivise their franchisees with high commission rates. Others use a mixture of licensing and other incentives to take advantage of differential taxation. Establishing a relationship of trust with franchisees is also important, and it is surprising how many franchising relationships operate on a ‘gentleman’s agreement’ basis – a properly set up franchise relationship is mutually beneficial to both sides.
- How replicable is the business model? Can it be delivered ‘in a box’ to potential franchisees?
- What is your level of brand recognition? This is particularly important when moving overseas.
- How easy will it be to control franchises and protect your brand position?
- Do the numbers add up? After taking into account the costs and risks borne by the franchiser, how does the income from franchising compare to your own internal rate of return?
Dan Murphy is a retail director at Ernst & Young.
This article was originally published in Masterclass magazine.
