This blog previously discussed the common ways a franchisor makes money. As we noted, almost all franchisors charge the following fees:
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. The second was “Rental Fees”: fees for developing a turnkey business and leasing it to the franchisee.
A third way is selling products and services to franchisees. The franchisor may choose to be the sole supplier of products and services, or it may be one of several suppliers. The franchisor is most likely to be the sole source of supply if the product or service contains confidential information or trade secrets.
To sell products and services to franchisees, the franchisor would:
Forming a separate company allows the franchisor to:
Although there is no cap on the markup the Supply Company may charge:
Selling products and services is beneficial to the franchisor because it allows the franchisor to: (i) maintain its quality standards; (ii) protect its proprietary information; and (iii) estimate the amount of the franchisee’s sales.
A franchisor will usually negotiate prices with suppliers. Purchasing products and services from the franchisor allows the franchisee to obtain the benefit of bulk purchase arrangements.
One well-known franchisor I represent earns over 35% of its revenue from the sale of branded merchandise through its franchised and company-owned restaurants. Another charges no initial franchise fee and no royalty: almost all of the franchisor’s revenues are derived from the sale of inventory to franchisees. Although this franchisor’s structure is unusual, it is highly effective in its market.