Franchising is a business unto itself, and understanding the revenue model is important. It is critical to understand how franchisors make money and how you can accelerate financial gain over time by making the right investments, having the right conversations, and making the difficult but necessary decisions that move the business forward.
Soon after you begin attending franchise conferences, you’ll most likely sit in on a session in which the speaker asks the group, “How does the franchisor make money?” Without fail, “franchise fees” is always the first answer given. Other common answers include “royalties,” “goods,” and “technology fees.” But the reality of the franchise industry is that most franchisor profit is generated from royalties. Though most conferences focus on franchise sales, lead generation, and closing deals, I think more should be dedicated to maximizing both franchisee unit economics and franchisor royalties.
The most successful and sustainable franchisors recognize that royalties are—or should be—where they make the majority of their profit. We know that we actually lose money on the sale of a franchise: It takes about 22 months, on average, before we achieve breakeven on the addition of a single-unit franchisee. With this level of investment in the selection, training, opening, and support of franchisees, it is critical to select great ones. Royalty dollars are not created equal. Top performers pay the most and consume the least resources—and vice versa for underperformers. Caution on just how important it is to select the right franchisees – the wrong ones generate little in royalties and cost too much to support for your system to remain sustainable. Select the right franchisees and then train and support them thoroughly in the launch phase and remain focused on their unit economics.
These are the 3 key ways that you make money in franchising:
- Royalties are where a franchisor makes the majority of their profit. Many franchisors actually lose money on the sale of a franchise. With the level of investment in the selection, training, opening and support, it is critical to select great franchisees. Top performing franchisees pay the majority of royalties and consume the least resources – and vice-versa.
- Drive to royalty self-sufficiency: you should know the point at which you attain royalty self-sufficiency and what is needed to get there. You want to know and drive towards the point where royalties cover all overhead costs and there is less pressure to earn franchise fees. This should generally be around the time a franchisor has 100 units open and ideally within 5 years.
- Focusing on franchisee success and working together with franchisees to maximize franchisee revenues and bottom-line profitability is the fastest way for franchisors to be successful. Why? Because successful franchisees will pay more in royalties, validate favorably when prospective franchisees call, and support and adopt the initiatives of the franchisor.
Here are 6 proven strategies to maximize royalties:
- Invest in a strong start for your franchisees.
- Be proactive in communication; don’t postpone the tough conversations with new franchisees.
- Offer “boost” programs to support struggling franchisees, and then have a clear plan for what to do should the boost not work.
- Be prepared to make acceptable exceptions for high-performance and high-attitude franchisees. They are your proven commodities.
- Review the list of your franchisees regularly and identify the bottom performers and build plans to support them up or out.
- Right-size the franchisee’s operation and/or geography to match the skills and capitalization of the franchisee.
“Royalties are where a franchisor makes the majority of their profit. Many franchisors actually lose money on the sale of a franchise. With the level of investment in the selection, training, opening and support, it is critical to select great franchisees. Top performing franchisees pay the majority of royalties and consume the least resources – and vice-versa.”
Shelly Sun Berkowitz, Grow Smart, Risk Less
Read More: Grow Smart, Risk Less by Shelly Sun Berkowitz is now available to read online!
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