The Adjustable Franchise Fee

What A Great Deal For You at This Show, Take It Or Lose It

BUCHAREST, Romania (Blue MauMau) - When buying a franchise, an investor pays for the effort a franchiser makes to bring eligible candidates into the network and also for supporting the new franchisee to get him up and going. In contrast, when paying royalties, a franchisee pays for the continuous effort of the franchiser to offer support and assistance during the term of the franchise agreement.

The failure of many franchise systems in finding the best candidates is often caused by the fact that these two fees aren't carefully designed and thought out by the franchiser, in order to create a win-win partnership between the franchiser and the franchisee.

At the Romanian franchise fair – Rofrancize – I stumbled upon two awkward situations:

1. Franchiser X asked for an entry fee of Euro 29,000, but, for those signing the franchise agreement during the Fair, the fee was only €7,000. (Note: Equal nowadays to about a zillion US dollars. Alright, technically it converts to US$10,600). That franchiser was counting on investors buying a franchise like they buy a pair of shoes. But unlike buying shoes, franchise law in Romania requires the franchiser to allow at least 20 days for a buyer to think carefully about signing a franchise agreement.

2. Meanwhile, Franchiser Y was asking for an franchise fee of €10,000, but for the first 10 franchisees signing the agreement the fee was only half of that sum.

What should the potential franchisee think when seeing such offers? “Does this mean that the actual support that I would get from the franchiser, plus a reasonable profit for him/her, is only €7,000 or €5,000, and not €29,000 or €10,000?”

In the first case, the franchiser's efforts may be worth more than €7,000, but he/she would pay the difference in order to get his/her first franchisees, in the second case it is clear that the franchise is worth actually not more than €5,000 as entry fee.

This “adjustable franchise fee” is clear evidence of amateurism for franchisers who think first of their own profits, and second about the real possibility of selling such a franchise. Such cases should make the potential franchisee think from the very beginning that something is wrong about these franchises. Buyer beware.

Has anyone else encountered such situations as well?