The Days of High Upfront International License Fees Are Over
A number of years ago certain franchisors that franchised internationally had a practice of trying to get the highest licensing fee as possible upfront. The justification for this practice was based upon several factors:
- The initial licensing fee was seen by the franchisor as primarily a profit generator rather than as reimbursement for related present and future franchisor expenses, costs of training, franchise system value and development costs.
- Franchisors were fearful of not receiving future royalty payments and felt that a higher upfront license fee could serve as a form of insurance if this happened. Fear of costly litigation in a foreign country was a related issue.
- Some franchisors preferred receiving a higher licensing fee in lieu of providing ongoing services and support. In other words, there was little interest in having a traditional franchise relationship.
- During this time international franchising was in the formative stages and some franchisors were apprehensive and unsure about the risks and saw a high licensing fee as a hedge against the risks.
These appeared to be valid reasons at the time, even though the practice differed compared to the relationship between an initial franchise fee and ongoing royalties in domestic franchising.
In today’s world of international franchising much has changed. Given the growth of franchising throughout the world and the amount of information available from the Internet and other sources, licensee candidates are more franchise savvy. Many recognize the difference between a reasonable license fee and one that is considered excessive. In addition, a qualified international licensee recognizes that capital needs to be available to open and grow the franchise operation.
Franchisors that choose to go international should realize that there needs to be balance between the initial fee and the income from ongoing royalties. Although the licensing fee will be higher and the ongoing royalty percent lower compared to a domestic franchise, the fact remains that franchisors should structure their international program with the same expectation as their domestic program.
Franchisors that seek to export their concept should understand that the bulk of their income should flow from a healthy ongoing international operation and not from a one time fee. If there are any doubts regarding this fact than perhaps the franchisor has the wrong candidate and/or the wrong country.