Insights

From what and how does the franchisor earn money?

With great pleasure, I can say that many companies are reaching out with inquiries aboufranchising their brands or concepts. The Croatian market for domestic franchises is beginning to show significant growth, particularly among brands that have professionally developed their franchise systems — which is excellent news for this part of the world.
A common question — and one that often comes with a great deal of misunderstanding — concerns the earnings of the franchisor, specifically how their income is structured and where it comes from. That’s why I decided to cover this topic, to make it easier for everyone to understand the potential that can be achieved through franchising their own concept. Let’s go step by step: there are two main fees that a franchisor charges — the Entry Fee and the Royalty Fee, also known as the Initial Fee and the Service Fee.

Entry Fee / Initial Royalty

The Entry Fee is charged as a one-time payment for the duration of the agreement. For the purposes of this example, let’s assume the Entry Fee is 10,000 Euros per franchise, or per single unit. In other words, when you grant a franchisee the rights to operate one location, those rights cost 10,000 Euros for the duration of the contract, which typically lasts for 10 years.
The Entry Fee is very important, and I strongly recommend that it be used and charged. The reason is that the Entry Fee demonstrates the franchisee’s seriousness and commitment. Very often, when a potential franchisee is unwilling to pay the Entry Fee, they are not a good candidate to become your franchise partner.

Royalty Fee / Service Royalty

The Royalty Fee is charged as a percentage of revenue. On average, the Royalty Fee in the franchise industry ranges between 4% and 7% of the franchisee’s income (excluding VAT). It’s very important to emphasize — and I always do — that this percentage is calculated from revenue, not profit.
So, if we take our example where the franchisee generates 100,000 Euros in annual revenue, the franchisor would invoice between 4,000 and 7,000 Euros for that year, depending on the Royalty Fee percentage — and this continues for the entire duration of the franchise agreement.

Marketing Fee

In some cases, franchisors charge a Marketing Fee to create a shared fund for promoting the brand. The Marketing Fee usually amounts to between 1% and 3%.
It is very important to know that, according to professional standards, the franchisor should be transparent with franchisees from whom they collect the Marketing Fee — clearly showing where and how exactly that budget has been spent.

MarkUp or Kickback Systems

The franchisor can also have agreed commissions with suppliers who provide goods or services to their franchisees, thereby generating additional income. For example, if a franchisee has 100,000 Euros in revenue and operates with a direct cost (COGS) of 35%, and the franchisor has a negotiated kickback from the supplier of 7%, the franchisor would earn an additional 2,450 Euros (100,000 * 35% = 35,000; 35,000 * 7% = 2,450).
Since I like to be specific, here you can see what the revenue structure would look like exactly under the following assumptions:
  • Each franchise location generates 100,000 Euros in annual revenue,
  • Two new locations are opened every year,
  • Entry Fee: 10,000 Euros,
  • Royalty Fee: 6%,
  • Marketing Fee: 1%,
  • Kickback: 7%.
This example is quite mild or conservative, as it’s based on a concept generating only 100,000 Euros per year. Many concepts in the F&B and retail industries generate several times more, which would significantly increase the franchisor’s revenue. Additionally, this example assumes only two new locations open each year and does not include any income from territory sales.
In fact, some franchise brands open hundreds of franchise locations each year and often expand through Area Development or Master Franchise agreements, which provide additional sources of revenue. However, we’ll cover these opportunities — along with the cost structure of franchisors — in one of the upcoming articles.
For all your questions about franchising and how to become part of a franchise, we’re here to help and would be happy to assist you. All you need to do is fill out the form.

New posts

Scroll to Top