By American College of Surgeons
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Typically, Determining Your Franchise Structure 101 service businesses can afford to pay higher percentages because their expenses are lower. But so are their gross sales. Businesses selling products with narrow margins will have higher sales levels but will pay smaller percentages. If you have been in business for a number of years, you should have little trouble determining what percentage of sales a franchisee can afford to pay and still make a profit. At the same time, if you have had no experience in franchising you will be less qualified to judge what you will need in royalty income to provide services needed by your franchisees.
If, on the other hand, your business is of a type that can be replicated for a low cost and is simple to operate, you may want to consider multi-unit (or area development) franchising, allowing well-financed individuals or companies to develop an entire market on a pre-determined schedule. But if yours is like most new franchises, whether or not you opt later for rapid expansion techniques, you will first sell individual franchises. 86 FRANCHISING YOUR BUSINESS Determining Your Franchise Structure 87 Here is a summary of the pros and cons for each type of franchise: Pros Cons Individual Franchise • Builds a strong company • Less sophisticated owners foundation • Owner operator • Limited capital • Furnishes own capital • More training required • Will do it your way • More support required • Faster saturation in market • Slower growth Area Development • Faster growth • Can’t get sophisticated buyers until you are bigger • More sophisticated operators • Heavier up-front expenditures • Capitalizes on window of • Can create a monster opportunity you can’t manage • Locks out competition • Requires larger more complex infrastructure • Gets there first • Rapid growth exposes weaknesses in system • Slower saturation in a given market.
Such encroachment has given rise to a number of nasty franchisor/franchisee disputes. If your business is of a certain type – sales offices and mobile units are examples – you may need to protect the territory of your franchisees because the practices of competitors or the demands of franchisees require it. This may also be true of businesses with locations that attract customers or from which deliveries originate. In such cases, we generally recommend that the franchisor assign an Area of Primary Responsibility (APR) to each franchisee.