How does a franchisor make money?
1. By charging for you to use their name. This can cost up to £100,000 but less for the smaller franchises.
2. By charging you for them to get you business. Mainly you'd pay 3x the monthly revenue and the contract still belongs to the franchisor (more of that in a while).
3. You get charged a % of the turnover (not profit) on every £ invoiced.
4. Some franchisors can even tell you what vehicles to run, which chemicals to use etc. Guess who gets a % off the manufacturers for this? You'll need to buy their t shirts, tabbards etc too and it will cost more than if you go direct to a local supplier.
Going back to the buying of contracts for a moment. Just think about this for a minute, you may be given a nice contract worth say £2,000 a month. This could cost you £6000 to buy. Now imagine that the customer makes a complaint about something your cleaner hasn't done. It's easy for the franchisor to simply say, "We'll change the franchisee" and then go and charge another £6000 off someone else. A fantastic revenue stream, encouraged by the franchisor.
Here's another little ruse used on a massive scale. You agree to 'buy' a certain amout of business (which is paid for up front) and this is 'guaranteed to be offered' before a certain date. So for argument sake, lets say you have gone in to a franchise and they are going to offer you £14,000 of monthly business before September 2009. Great, you think, a £1000 a month of business to control, easy. Erm....this is what can and often does happen. The franchisor has a big contract in your area, or a number off smaller 'national accounts' lets say WH Smiths (again for arguments sake). In the first week of starting business you could be offered 3 stores starting in a week with a revenue of £5000 per shop.
Wow, you think thats brilliant. Then you start working out that you'd need 3 x scrubber dryers, lots of vacuums, mops and buckets etc etc and the first months payroll will be around £8,000 with no guarantee of the customer paying before the next payroll of another £8,000.....can you afford that. Can you control it, can you be on site enough to get this right, to manage the staff. Can your cash flow cope?
Now after careful consideration, you decide its too big / can't be afforded and turn it down. Guess what? You've been offered your £14,000 up to September 2009 and now the franchisor has up held their obligation to you and lets say the franchise is over 20 yrs. They now have the next 20 yrs to get you the £14,000 a month of business!!!!!! You're screwed.
From a franchisors point of view, the more you do this, the less the obligation to get business in a timeframe, therefore less sales reps needed, less cost for them...and they already have your money.
Do your homework properly if you fancy a franchise. Now what I have explained above is what a certain franchise did (and what I had to do) when I worked for them. Things may be different (for better or worse now) so ask the questions.