Going into a franchise certainly represents an entrepreneurial adventure, but also a contractual relationship with a network that provides you with its concept, its know-how and its brand. Of course, all this is not free.
You will first have to honor Entrance fees. This is also called the fixed initial fee, paid upon signing the contract. His utility ? Remunerate the network head for services rendered before the opening of the point of sale or the launch of the service. This sum contributes to paying your selection costs, the transmission of know-how, the authorization to use the brand, help in finding a location, the supply of marketing material, but also the updating provision of a customer database without forgetting the assistance for the inauguration. Please note: to display lower entry fees, some brands are imaginative and extract certain services from this amount. They will then be invoiced to you separately, but you will still have to pay them. Therefore, if you hesitate between several brands, be sure to compare what is comparable by checking what precisely these famous sesames encompass.
Signing a franchise contract also commits you to pay various contributions, often monthly, two in number. The first, called “royalty fee main“, corresponds to the support costs from which you will benefit from the network after the opening, as well as to the remuneration of the latter during the duration of the contract. The method of calculating this “tax” differs according to the brands. It can be fixed, with the payment each month of a predefined sum in advance.The advantage of this formula: it does not vary from one month to another and allows you to predict the evolution of your cash flow. It is especially common in trades where a lot of cash circulates (hairdressing, bakery, etc.) and where those concerned may be tempted to hide part of their receipts – which would amputate an amount calculated as a percentage of the turnover. ‘business…
A rebate the first year
The other possible calculation formula is the variable fee, and it is very widespread. In this case, you will have to pay the franchisor a percentage of your turnover each month between 2 and 10% depending on the brand. A configuration obviously more complicated to anticipate.
Some of them modulate this sum by making it degressive. Clearly, from a certain turnover threshold, the share to be paid to the head of the network decreases. Above a certain amount, therefore, it considers that the additional fee results from your excellence and your added value. And rewards you for your good performance. Other brands, for their part, grant a rebate on the fee during the first year of the contract. And raise it at a normal rate for the remaining term of the contract.
Conclusion: to avoid unpleasant surprises, really go into the detail of the mechanism of these calculations. And be careful not to systematically compare the rate of your royalty with that of other members. Indeed, to take into account the economic reality and the capacity of certain points of sale, certain networks do not apply the same rate to all their associates. A hairdressing brand may require 10% for a salon located in a large city and half the percentage for a modest establishment located in a rural area. The same goes for auto centers. In this sector, the tax can be indexed to the number of repair tracks. Finally, if you are one of the first franchisees in a network, you can hope to benefit from a lower rate than your “colleagues” who arrived later. In this case, in fact, it is considered that you have in a way “weathered the plaster” while the following ones have immediately benefited from an already established notoriety and more substantial services. And that it is therefore logical to ask them to pay a higher fee.
You should also know that, if, by chance, you do not reach the expected turnover (calculated by the brand in view of the receipts garnered by the other units), your company will still have to pay a lump sum to remunerate the franchisor and not a percentage of its turnover. If the franchisor estimates, for example, that your unit should have recorded at least 200,000 euros in revenue and this is not the case, you will have to pay 10,000 euros for the year, that is to say what you would have had to pay for a tax equivalent to 5% of 200,000 euros.
Prepare yourself with the worst in mind
Finally, in addition to these different contributions, you will also have to bear a communications fee. Mainly practiced by brands with at least a hundred units, it is used to finance national advertising campaigns, the brand’s website and its social networks… Its amount varies between 1 and 4% of turnover depending on brand and industry – and it’s often non-negotiable.
You will have understood: all of these taxes are quickly likely to weigh down your operating account. It is therefore essential to take as many precautions as possible before signing. Put in report on the one hand the requested amounts; on the other, the service and the additional revenue provided by the network. Ask yourself this question: assuming you don’t have to bear that burden, how much would you still have to pay to get the same result? If, each month, your franchisor did not tell you how to arrange your point of sale, for example, how much would it cost you to hire a window dresser?
To avoid unpleasant surprises, think of the worst. Ask your accountant whether, with a much slower start than expected, you would be able to afford a lump sum tax. If so, perfect. Otherwise, turn to another network, more affordable for your finances.
An article from the “Franchise” special issue of L’Express. On sale since March 16.