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Do Not Fall Into the ‘No Franchise Fees, No Royalties’ Trap

Money trap

Money trap

It seems that, to some people, the biggest downside of franchise opportunities are the franchise fees and royalties.

Those two are the reason why some people ‘despise’ franchising and look to non-franchise business opportunities. Their main reason is that the fees and royalties are stripping off a large part of the business’ profit; in other words, franchise fees and royalties are expensive.

Non-franchise business opportunities (BOs) are smart – They see a market to tap into, and they use “No franchise fees, no royalties” to pitch to potential investors.

Although BOs have their rights to use whatever marketing methods they feel the most effective, but I suggest you not to fall into the trap.

With all due respect to BO owners, using the “no franchise fees, no royalties” pitch to recruit investors is simply misleading – Franchise opportunities have their own benefits in its own way (as BOs do), and most BOs are not telling the whole story behind the pitch.

That being said, before you take any investment decisions in BOs, you need to understand what franchise fees and royalties are for in the first place.

Franchise fees and royalties: The values of franchises’ brand names and proven systems

In franchising, you borrow the franchise’s brand name and system in exchange for franchise fees (usually last for 5 years and renewable) and monthly royalties (usually a percentage of sales or profit.) You can borrow a BO’s brand name and system, too, without any franchise fees or royalties. But take heed, here is the difference between a franchise and a BO:

Franchise opportunities are time-tested and allow you to enjoy the luxury of no trial-and-errors in brand and business building. In the other hand, BOs are generally not time-tested, and allow you to take part in their successes and failures in building the brand name.

So, in other words, with BOs, you are exposed to a larger failure risk in exchange for the “no franchise fees, no royalties.”

Don’t get me wrong – Many BOs are great business: They can, eventually, turn their business model to franchising to boost their growth beyond the low rooftop of BO (while some others prefer to keep their BO status.)

What I’m trying to persuade you to do is to analyse (and weigh) the opportunities presented to you – Is a franchise opportunity can help you achieve success better with the fees and royalties related to it? Or, is a business opportunity can help you achieve what you want without the burdening fees and royalties? How’s the potential of the franchise or BO?

All in all, the biggest analytical question is this: Will the opportunities, either franchise or non-franchise, possess long business life-cycles – Long enough to allow you to recoup your investment and benefit from your business way beyond the reached ROI milestone?

Do not easily fall into the ‘no franchise fees, no royalties’ trap – Know that everything in the world bears the concept of yin-yang (pro and cons, plus and minus, god and bad, upside and downside, etc.): There’s got to be something in return at the expense of the ‘no franchise fees, no royalties’ pitch.

In my opinion, buying a franchise is a better option than invest in a non-franchise opportunity, as long as the amount of the franchise fee and royalties are justifiable.

What is your opinion on this? Please share yours by commenting on this article šŸ™‚

Ivan Widjaya
Franchising rules
Image by nusrin.

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2 Responses to “Do Not Fall Into the ‘No Franchise Fees, No Royalties’ Trap”

  • I think another way to look at Franchise fees is Return On Investment. If you are considering buying a franchise as opposed to starting your own, do you have the operation, sales and marketing and management systems to do it on your own? Do you have your concept fine tuned and “market ready” so it can be rolled out quicker than a competitor can undemine you and who will provide you with your training…plus many other questions relevant to your specific situation. Is buying a franchise with its proven systems going to get you in business quicker and with a higher quality? How much will it cost you to get your business open and running as oppposedto the costs of buying the franchise? With these questions and answers you need to be able to work out which is the best investment for you and thereby make a better informed decision.

  • Ivan Widjaya:

    Andrew,

    I agree – Franchise fee is, indeed, a form of investment that many overlooked as being “expensive” and “doesn’t make sense.” People do forget that with all the concept, system and operational procedures, franchise fees are pretty much justifiable and can be measured in the form of ROI. Starting on your own or investing on a BO require a lot more resources, in term of money, time and effort – At least, to get the concept tested and system proven.

    I’ve started my own business and invest in a franchise – By all means, buying a franchise, although more expensive, will return you better with less effort (franchising is very suitable is you are not a big risk taker, IMO)

    Thanks for sharing your thoughts šŸ™‚

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