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Making Money as a Franchisor: Developing Franchisees’ Sites

This blog previously discussed the common ways a franchisor makes money.  As we noted, almost all franchisors charge the following fees:

  • An initial franchise fee;
  • A periodic (weekly or monthly) royalty;
  • A development fee or territory fee; and
  • A periodic advertising fee.

There are, however, other sources of revenue.  Many of these can provide significant benefits to both you and your franchisees.  One of these is a fee for developing the franchisees’ sites.  For convenience, we will refer to this as a “Buildout Fee.”

If your franchise is a bricks-and-mortar business, you may want to form a development company.  Although the development company would be an affiliate of your franchise company, it would be a separate legal entity.  This development affiliate would build out the franchisees’ stores, restaurants, or other premises, in exchange for the Buildout Fee.

Development services benefit you because: (i) your affiliate gets the Buildout Fee; and (ii) you are assured that the development meets your standards.

Development services benefit your franchisees because the franchisees: (i) are relieved of the burdens that come with construction; e.g., finding a contractor, reviewing construction contracts, managing the buildout, and completing the permitting process; and (ii) are able to focus their energies where they will do the most good—planning, leading, organizing, controlling, managing, staffing, and training.

Franchisors rarely venture into developing franchisees’ sites.  They are often concerned that they may be subject to liability if the franchisee is dissatisfied with the development company’s performance, if the franchisee is unprofitable, or if other issues arise.

Although a franchisor should always be mindful of the potential for liability, the franchisor can minimize its risk by ensuring that its development agreement and related documentation require the franchisee to: (i) agree that the development company is the sole and exclusive entity that may be liable; (ii) agree that the franchisor shall have no liability arising out of or related to site development; and (iii) covenant, warrant, represent, and agree that the franchisee will not sue the franchisor.

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