WHO MAKES THE MONEY?

The basic principle behind franchising is that someone develops a business format and an operating system with some advantages over other existing businesses in the market. By franchising, this person (called the franchisor) then replicates or clones his or her business in other geographic areas by granting the right to another (the franchisee) to operate the same business system under the same name, usually for a fixed and potentially renewable term.

The franchisor gains income from an initial fee paid by the franchisee to gain access to the franchise brand, training and systems, and from ongoing fees or royalties paid by the franchisee. In return, the franchisor must provide a variety of services to encourage the continuing profitability and growth of the franchisee’s business. The franchisee receives their income from marketing a desirable product or service under a desirable brand name.

This basic approach, called business format franchising, has proved to be the most dynamic form of marketing and distribution in the world over the past 70-plus years.

But one of the most common questions raised by anyone contemplating buying a franchise is: Who really makes the money – the franchisee or the franchisor?

Understandably, in the tougher economic times currently being experienced in this country, there’s even more reason to raise this question.

Some people might suggest that it’s the franchisor who’s getting the main financial benefit. Anecdotally that is often the perception, and misconception, whenever the subject of a conversation turns to franchise businesses.

The simple truth is, while a franchise business won’t necessarily make you totally immune from economic downturns, it does mean that you have a fully supportive system behind you, managed by the franchisor, whose priority is to do their best to keep you making money and enjoying success, no matter what state the economy is in.

The franchise relationship

Philip Morrison of Franchise Accountants, who has worked with over 1000 potential buyers evaluating over 250 different franchise systems, describes a franchise business as an interdependent symbiotic relationship – one in which the franchisor is ‘senior partner’ and each franchisee is a ‘junior partner’.

He says the reason why people may think it’s the franchisor making all the money, is often a lack of understanding around how the franchise model works, and a belief that there isn’t parity in the relationship.

“If a franchisee believes his business is not living up to expectations regarding income, then the first thing to do is have a serious chat with the franchisor,” suggests Philip.

Being transparent

Caro Wedding is in a good place to judge who makes the money: she sits in the middle of the franchisor-franchisee relationship as a regional master franchisee for CrestClean West Auckland and North Shore. Caro, who is also winner of the 2024 Westpac New Zealand Franchise Awards Regional Master Franchisee of the Year, agrees that it’s important to talk to the franchisor team about any aspect of income. “Be as transparent as possible if you have concerns about your business’ income.”

As a regional master franchisee, Caro manages many of the tasks of the franchisor in her area, increasing efficiency and reducing costs for the franchise system. With master franchising, franchisees typically pay their initial fee and ongoing royalties to the master franchisee, who in turn pays a proportion of these fees to the franchisor. Unlike multi-level marketing schemes, the ‘chain’ stops there - the role of the franchisee is to deliver the product or service successfully and profitably, not to recruit additional franchisees.

Caro explains that when talking to potential new franchisees she always provides transparency around financial gain, costs and fees. “Because many of our franchisees start off with a part-time business as a secondary income for their families, we do recommend they work towards becoming a full-time franchise, as this will be where they can step into specialised work which is more profitable.

“Often, financial success comes down to mindset,” she adds. “Putting the customer first and recognising that it’s the little things and personal relationships that make the difference.”

Buying a franchise purely for financial gain is not advisable either, as running a business provides challenges and benefits beyond the associated income.

“Obviously financial freedom will be a natural outcome of all the other good habits and professionalism conducted within your franchise business,” says Caro, “and we encourage franchisees to develop business plans with which they can grow and flourish over time.”

Goal setting is vital too, she believes. “For example, around 70% of our franchisees have the goal of home ownership, and many progress beyond that to purchasing rental properties.”

Franchisors make more: fact or fiction?

So, with strong goals and a business plan, and a good system behind them, the franchisee should make money – but since they are collecting all those fees from franchisees, won’t the franchisor just make more?

Dr Callum Floyd of system development specialists Franchize Consultants says a well-structured franchisor with near full-market penetration and a substantial network of franchisees will almost certainly be making more money than franchisees running an individual franchise unit.

“You should be concerned if that wasn’t the case,” says Callum, “as franchisees will want to know that their franchisor is also successful financially and therefore has the capacity to provide great support, as well as innovate and invest in the future...

This article is published in full on page 6 of the Spring 2025 (Year 34 Issue 3) issue of Franchise New Zealand magazine.

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