Why Some Franchisors Almost Always Fail

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Franchise recruitment sales is complex work.

It's very competitive out there and even more so for capital intensive franchises targeting high net worth sophisticated franchise buyers who are willing to commit to multi-unit development under an Area Development Agreement.

I have a lot of sympathy for franchise sales teams since they are under tremendous pressure to make sales happen and grow their brand.

No matter the size of the franchisor they all have budgets with a limit.

And with new franchisee marketing acquisition costs for these capital intensive franchises ranging from $12,000 - $25,000 you can easily speed through your budget doing trade shows, email blasts, direct mail, local market events, franchise portals, display print, PR, search engine optimization and social media marketing.

If we assume a $18,750 average franchise marketing acquisition cost and the franchisor wants to sell 20 new franchise deals it will require $375,000 in your marketing budget. You plan for that in your budget meetings. Before you start to sell.

But, then when it comes time to make the sale, you decide on "franchisor franchisee new development incentives" in the form of a fee and royalty reductions.

I have seen ranges from $10,000 - $30,000 with one franchisor waiving their upfront franchise fee entirely.

Will the franchisor's franchise fee incentive sell more franchises to existing franchisees?

Maybe, but I would argue if the franchisee cash-on-cash return for that franchise concept was compelling that most of those franchisees were already planning on developing new units and would have done so without a discount. The franchisor might recruit new franchisees because of the discount?

But I think that those new franchisees are like your smart existing franchisees who are looking at the numbers for an attractive cash-on-cash return. If they are not carefully considering the investment, do you as a franchisor want those franchise buyers?

But let's assume you need the $15,000 franchise fee discount to sell. What that does that do to your budget if you sell the same 20 franchises you would have normally sold?

This results in your new franchisee marketing acquisition cost per sale rising to $33,750 and a total annual cost of $675,000.

Almost a 100% increase in your acquisition budget! Would you have agreed to that at beginning of the sales process? Likely not, and you probably shouldn't agree now - especially when there are alternatives.


This is why I think across the board franchise fee discounts are bad business because they can cause discontent with your franchisees who paid full-price and they are likely not the solution to your franchise sales problem.

Here are the 4 things you should do instead of discounting your franchise fees -

  1. Increase Your Franchise Marketing Recruitment Budget

  2. Increase Your Franchise Fee to Invest in Your Budget

  3. Drop Your Bottom Three Franchise Lead Sources

  4. Re-engineer Your Franchise Sales Process

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About this Entry

This page contains a single entry by Joe Caruso published on May 11, 2015 12:22 PM.

How to Use Your Franchisee's Suggestions Effectively was the previous entry in this blog.

9 Ways to Deal with Difficult Employees is the next entry in this blog.

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