Establishing and justifying international license fees: the franchisor and the licensee need the chance to make an acceptable return on investment.

Author:Edwards, William
Position:INTERNATIONAL DEVELOPMENT
 
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This analysis is based on the more than 100 years of collective international operating experience, specific market research and work done for more than 40 different franchises of various types and sizes in more than 50 countries ranging from emerging markets to highly developed countries.

The bottom line: no matter what method is used to calculate the initial area or master license fee, it needs to allow both the franchisor and licensee the chance to make an acceptable return on investment.

Area License

Food franchises normally grant area licenses for a certain number of units rather than a specific geographic territory. They often set their initial international area license fees based on their U.S. unit franchise fee times the number of units in the license. Hence, a 10-unit license for a franchise with a U.S. $50,000/unit franchise fee is usually U.S. $500,000 for the initial international area license fee.

A franchise specific additional training fee of U.S. $30,000 to $50,000 is often added as an itemized fee, due to the extensive nature of initial training and business launch support involved with restaurant brands.

Area licensee candidates are often interested in the rights or option to sub-franchise. However, such discussions, rights and related fees are most often deferred until the licensee demonstrates a superior development and operating performance of their in-country units, if at all. Most food franchises do not allow sub-licensing because of the great potential to lose brand integrity. Some retail franchises also grant area licenses with no right to sub-franchise.

Franchisors that use area licenses to grow globally include such franchises as Carl's, Jr., Baja Fresh, The Melting Pot and Round Table Pizza.

Country Master License

For the more typical master license granted by service, retail, education and other franchise concepts, an initial master license fee is charged based on franchisor costs and on the expected number of units to be opened in a country under an agreed development schedule. It is also common for the franchisor to earn an appropriate profit from the award of a master license.

Franchisors that grant country master franchises to grow globally include Mr. Handyman, Signs Now and Two Men and A Truck.

There are numerous methods of establishing the initial master license fee for a particular brand and country. Some franchisors merely set a fee based on the size and sophistication of the country. Hence, under this...

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