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Making money as a franchisor: Advertising Fees

This post is the fifth installment of the post dated March 17, 2015, titled “How Do I Make Money as a Franchisor?”  This installment will treat Advertising Fees.

Most franchisors charge “Advertising Fees,” or “Ad Fees.”  “Ad Fees” are continuing fees franchisors charge franchisees for advertising and promotional efforts by the franchisor.

Ad Fees may be based on a percentage of the franchisees’ sales, or they may be a flat amount.  The percentages and amounts vary widely depending on the franchisees’ gross sales, the cost of the franchise, advertising the franchisor conducts, and other factors.

If Ad Fees are Based on a Percentage of the Franchisees’ Sales:

There is no “standard” Ad Fee percentage.  However, in most markets, an Ad Fee percentage higher than 3% is considered to be on the high side of normal; a percentage below 2% is considered to be on the low side.

If Ad Fees are a Flat Amount:

I have seen flat Ad Fees range from a high of $7,500 a month to a low of $500 a month.  The high amount was for a restaurant chain with restaurants that averaged over $3,000,000 per year in gross sales, that advertised aggressively with sports promotions and in broadcast media, and that cost about $800,000 to $3,500,000 per restaurant to develop.  The low amount was for a low-cost franchise in a small system.  The franchisor offered point of purchase materials, a website, and little else.

Ad Fees Generally

Franchisors usually use Ad Fees to promote the system’s outlets and the goods and services the system offers.  Thus, technically, the franchisor is not making money from Ad Fees: it is simply a conduit for the amounts franchisees contribute.

However, a well-drafted set of franchise documents will allow the franchisor to use a portion of the Ad Fees it collects to set off amounts it spends on overhead connected with advertising.  If the franchise documents are broadly-drafted, this could allow the franchisor to use Ad Fees to pay most of the costs of its marketing department.  The franchisor could also use Ad Fees to pay the marketing department’s share of the franchisor’s finance and accounting, research, operations, and administrative expenses, and other overhead.

Although Ad Fees are rarely a moneymaker for the franchisor, the ability to use them to defray a portion of the franchisor’s costs makes them a valuable tool for a franchisor’s profitability.

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