Franchise Fees Part III - Ad Fee

By
A A A
Share |

Making Sense of Advertising Fees

Brand identity. How do you achieve it? Advertising! Every business owner knows that brand identity drives customers and revenues, but how many small business owners can afford to saturate a marketplace to develop brand identity. Not many, unless they're part of a franchise network.

And yet we often hear from franchise prospects that franchising is too expensive and that part of the reason it is too expensive is the advertising or marketing fund fee assessed by the franchisor. If brand identity is critical to the success of a business, then how do you make sense of the fees franchisees pay to advertise?

Who owns the Ad Fund Money?

First, it's important to know that franchisors may require franchisees to pay a monthly flat fee for advertising, or (more commonly) a royalty.

Typically, the advertising royalty runs between 2% and 3% of the franchise unit's gross sales, collected monthly. It's also important to know that advertising royalties always belong to the franchisees and never to the franchisor. A franchisor that violates this principle will not only lose credibility and trust, but is likely to face serious consequences in a courtroom battle. Even though the franchisor may collect the ad royalties, these funds must be held separate from the franchisor's operating royalties and accounted for separately.

Two to three cents of every dollar collected by a franchise unit doesn't sound like a lot of money, but it adds up quickly. The ad funds of the top franchise networks in America each amount to millions (some are in the billions) of dollars annually - money that can be wisely invested in all types of media, as well as events and promotions, to build brand identity. How would a single business owner - selling pizza, plumbing, haircuts, coffee, etc. - afford to advertise on billboards, TV, radio, and online? You know the answer: The mom and pop business owners cannot do it. They cannot afford to build brand identity, and consequently they cannot compete with franchised units.

Deciding how to spend the money

In a franchise network, franchisees not only can afford a variety of effective advertising and marketing campaigns, but they also get the opportunity to voice their opinions about how their money should be spent. Franchisors generally organize a committee that includes members of the franchisor management team and franchisees to distribute the funds. The franchisees may be appointed by the franchisor, or elected by their peers.

However, most franchisors and franchisees admit that they're not knowledgeable about advertising, and even if they are, they're not prepared to develop and execute marketing plans, which includes expertly buying media (How much TV exposure is too much? How many billboards are necessary to make an impact?) and negotiating advertising fees. That's why franchise networks select media agencies to do the work for them.

Franchising isn't an inexpensive proposition - but is any business? Franchising comes with fees and some people conclude that the fees make franchising too expensive. Others, however, including franchisors and franchisees who have profited from franchising, will say that the fees are reasonable and necessary to build successful businesses. Ultimately, you'll have to decide if the franchise fees make sense for you.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks:

MFV Franchise Expo


More from MFV Franchise Expo:

Related Videos

Stocks

Referenced

Most Active by Volume

30,043,990
  • $15.54 ▲ 0.13%
23,563,274
  • $69.4401 ▲ 0.06%
22,351,984
  • $94.2751 ▲ 0.36%
20,648,086
  • $3.8253 ▲ 1.20%
19,522,786
  • $34.48 ▲ 1.23%
18,577,549
  • $44.9362 ▲ 0.23%
18,487,856
  • $2.53 ▲ 14.48%
16,530,243
  • $25.885 ▼ 0.37%
As of 7/22/2014, 12:15 PM