Making Money as a Franchisor: Lease of a Turnkey Business
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.
We also began discussing less-common ways a franchisor makes money. The first of these was charging “Buildout Fees”: fees for developing a franchisee’s site.
There is a logical and natural progression from “developing a franchisee’s site” to “providing a turnkey business.” A “turnkey business” is a business that is ready to use. It exists in a condition that allows for immediate operation. The term “turnkey” simply means that one need only “turn the key to unlock the doors” to begin operations.
To “provide a turnkey business,” you would:
- Develop the franchisee’s site;
- Build out a turnkey business; and
- Lease the turnkey business to the franchisee.
For convenience, we will refer to this as a “Turnkey Lease.”
One of the agreements used in connection with the Turnkey Lease is, obviously, the lease agreement itself. This agreement adds some cost to the development of your franchise offering; however, the cost is relatively minimal. Among many other things, the lease agreement: (i) requires the franchisee to pay you a periodic (usually monthly) rent in an amount that provides you with a profit; (ii) provides that any improvements the franchisee makes become yours; and (iii) prevents the franchisee from using the site for anything but the operation of your franchise.
A Turnkey Lease benefits you because: (i) it sharply reduces the amount prospective franchisees must have, thereby expanding your pool of prospective franchisees; (ii) it provides you with what may be a significant source of revenue; (iii) it expands your control over the franchise; and (iv) on the expiration of the natural term of the franchise (or if you terminate the franchisee), you get the business back. Its goodwill belongs to you. The former franchisee cannot compete against you from its space because you own the space.
A Turnkey Lease benefits your franchisees because the franchisees: (i) are relieved of the burdens that come with developing the business’s physical structure and with purchasing and installing furniture, fixtures, equipment, décor, and signage; (ii) are able to own a business with minimal initial capital investment; and (iii) are able to focus their energies where they will do the most good—planning, leading, organizing, controlling, managing, staffing, and training.