What is a franchisor’s main source of earnings?

Franchisors obtain income from a number of sources:  • Initial fees paid by franchisees. • Continuing fees, normally referred to as ‘management service fees’ and calculated as a percentage of a franchisee’s turnover - the average MSF in the UK is approximately eight per cent. • Advertising levies payable by franchisees - normally approximately two per cent - to enable the brand to be marketed and promoted. • Mark-up on goods or services.  Not all franchisors receive income from all of these sources, but all franchisors receive income from, at least, some of these sources. The crucial point about all franchisors’ sources of income is that there must be transparency, so that the franchisee is aware that the franchisor is obtaining an income stream.  While the above sets out sources of income for the franchisor, not all of these sources should be a source of profit. The initial fee, for instance, should generally not contain a profit element for the franchisor. Its purpose is simply to reimburse the franchisor the very considerable initial costs incurred in recruiting a franchisee. Likewise, the marketing levy should only be spent on marketing activities and should not contain any profit element for the franchisor, although it is quite proper for a franchisor to recharge its internal marketing costs to the marketing fund.