Your franchisee is struggling with royalty fees. How can you help them improve their profitability?

There are a variety of different ways franchisors acquire royalty fees. Many take a % or gross turnover, others have a fixed fee, others have a combo of the two (whichever is higher). I use a simple process with franchisees in this arena. Go through their bank statement and cross off everything that directly helps 'get a new customer' or 'keep a customer'. Analyse the rest looking for wastage (money and time) and the potential to use alternative suppliers. (where the franchisor allows). Analyse the sales to see how the profit (in dollars) is spread across their sales. A client increased their net profit by over 15% by changing the 'mix' of sales and what they promoted. Revenue remained unchanged. Then you can look at price.

Focusing on expense management is crucial for franchisees to handle royalty fees effectively. Encouraging franchisees to analyze their expenses can identify costsaving opportunities. For example, a franchisee might discover that by switching to a local supplier, they can save on shipping costs without compromising product quality. Regular Expense Audits: Schedule monthly reviews to identify unnecessary costs. Supplier Negotiations: Look for deals or bulk discounts to lower inventory costs. Energy Efficiency: Implement practices like using LED lighting to reduce energy consumption. Staff Training: Train employees on efficient resource usage. Strategies can help franchisees enhance their profitability, making royalty fees more manageable.

Increasing sales is key to improving profitability and easing royalty fees. Work with your franchisee to create marketing strategies tailored to their local market, such as promotional campaigns, loyalty programs, or community engagement. For example, launching a loyalty program can reward repeat customers and drive frequent visits. Community involvement, like sponsoring local events, can enhance brand visibility and attract new customers. Tips: Create local promotions to boost traffic. Utilize social media for targeted marketing. Implement rewards to encourage repeat business. Engage with the community to increase brand awareness. These strategies help increase revenue and manage royalty fees.

If only solving for profitability was as easy as 'boosting sales'. Generally - if a franchisee has found difficulty with royalty fees, it's because other parts of the system have broken and resulted in a loss of sales. To boost sales, go back to square one and make sure that the franchisee is following the playbook. The staff is trained and performing as expected, the end product going to the customer is excellent, and the location has committed to investing in local marketing.

Franchisees need to develop deeper understanding of the model they are planning to adopt. Some expenses are non negotiable namely rent, salaries, energy cost, consumables, etc. Agreements are generally watertight and may not have scope to maneuver around payables such as royalty. Generally, royalty becomes a problem case during months of poor business. Eventually it piles up and becomes an outstanding liability. Every business has its bad months, the only way to navigate it is by improving business efficiency & aligning revenue goals with the entire team.

As a franchisor, does your unit-level P&L look something like this? It's probably not too far off. Cost of product - 40% Labor - 35% Rent and related - 10% Other operating costs - 10% Franchise royalty - 5% If so, you can see there is no profit for the franchisee. He is a junior partner in his own venture. Not good. Job #1 - The franchisee must be able to make a profit at the unit level. So, look at your company's unit-level financial model. If there is not a profit margin of 15% or more baked into the operating format, then you should not franchise your system. If the franchisee is not paying royalties, it is because his margins do not allow him to remain in business and pay you, too!