Franchise knowledge centre

What is unencumbered cash and what is it used for in franchising?

Simply put, unencumbered cash means the money that belongs to the franchisee and has no financial liability attached to it. Remember, the franchise business is not going to be immediately profitable; it may have slow months, and the higher the loaned percentage of capital, the more pressure there is on the franchisee to pay it back instead of being able to redirect any profits back into the business to build equity. The second reason is what is called “skin in the game”. When franchisors and the bank can see the franchisees are prepared to invest a substantial percentage of the required capital from own funds, it reflects the franchisee’s level of commitment.

How does the franchisor spend the franchisee’s fees?

The fee covers the use of a trademark and brand name, as well as services, including training programs, marketing and sales materials, construction and start-up assistance, site selection, new product development, newsletters, and regional and national meetings.

What value do franchisees get in exchange for their monthly fee?

Royalties are a crucial element to consider when franchisees are looking at a franchise or negotiating a contract. Royalties are paid to the franchisor periodically/monthly and need to be budgeted for. The franchise agreement states how much and when the franchisee will pay royalties. Royalty fees are tied to the franchisee’s sales of products or services and tend to cover ongoing training, updates to manuals, advertising and promotions.

• Not having a concept that works or which is unique, special or cannot be copied by others.
• If the brand does not fully develop the concept and implementation and to work out the kinks. Franchisees purchase franchises to obtain the guidance and support that they need to establish and operate the business and to avoid the mistakes that they would make if they were starting their own businesses without affiliation with a franchise system.
• Not having or developing a strong brand name.
• Failure to "select" suitable franchisees.
• Not having a financially successful business.
• Non-fulfilment of franchisors to support franchisees with starting the franchised business.
• Unable to continuously develop the franchised concept and provide continued support for the franchise system. Franchisees are frequently frustrated with the lack of fresh business, marketing and other ideas from the franchisor over time and wonder why they are continuing to pay royalties to the franchisor when it is not continuing to provide anything of value.
• Failure to adopt and enforce franchise system requirements and guidelines. A key principle of a franchise system is consistency of operations. The failure to adopt policies and procedures that result in that consistency, and the failure to monitor compliance with those policies and procedures, resulting in quality differences and the failure to maintain high standards. This, in turn, damages the trademarks, each of the franchised businesses and ultimately the franchise system.
• Failure to respect franchisees by valuing what they can contribute to the franchise system.

Sectors in franchising include:

• Automotive
• Business to business
• Fast food and restaurants
• Financial services
• Retail
• Health and beauty
• Education
• Fuel