A royalty fee or management service fee is the ongoing fee payable by the franchisee to the franchisor in exchange for receiving ongoing assistance in all aspects of operating the business.
It’s usually calculated as a percentage of sales or a fixed amount. Franchisees sometimes tend to try their luck and request the franchisor to allow them a break on paying royalties for a month or two while the franchisee is in financial distress. The question is, should you allow for such a royalty break?
In our opinion, we always advise NO and here are some of the reasons why:
- The need for a royalty break points to a more serious problem within the franchisee’s business, providing a royalty break might provide a short term cash flow solution however it does not solve the bigger problem within the franchisee’s business – it is not a long term solution
- The franchisee almost never utilises the savings gained from the royalty break as it should be utilised (eg: for solving the problem in the business)
- Providing a royalty break to one franchisee sets a precedent amongst the franchised network, all franchisees will feel they are entitled to a royalty break
- A franchisee will then always request royalty breaks as the easiest solution to cash flow problems – this drives the wrong behaviour from franchisees as they will always look for ways to get out of paying the royalty
So how can you assist your franchisee, if not by way of allowing for a royalty break?
- It comes down to the all-important monthly store visits by your field service consultant – the field service consultant plays a critical role in your franchisee-franchisor relationship. This monthly visit should not be merely an operational checklist and compliance type visit, but a meaningful visit whereby, in addition to checking compliance, the franchisee and field service consultant discuss the franchisee’s past monthly financial performance (sales, gross profit, expense management, stock management), local marketing plans and measurements, staff relations and management, corporate governance (eg: help with tax) etc. In this way you have added value to the overall business of the franchisee and have not just checked operational compliance.
- Constant engagement and training of the franchisee and staff. Things like open lines of communication, trust, constant benchmarking, assistance with financial management, marketing etc would all add value to the franchisee’s business and potentially help avoid bigger problems in the future. Both parties should strive for a win / win relationship which usually results in a successful business. Often franchisees feel embarrassed to let you know that they are struggling and therefore hide the fact, If you facilitate a trusting supportive environment for franchisees, this may help in early detection of problems
- You can also send in an “ICU” team to a struggling franchise to assess and help resolve where the problems lie in the franchise business
- Instead of providing a royalty break, you can dedicate the money received from the royalty received to specifically assist the struggling franchise, for example using the money to increase local marketing and promotions, provide additional training to the franchisee and staff etc
- Assisting the franchisee to negotiate in unique situations, for example: if a shopping centre is going through a revamp which reduces foot traffic and clientele, you could help the franchisee negotiate reduced rental costs during this time – as mentioned above, the role and quality of engagement of the field service consultant is critical for early detection and resolution of problems.
Therefore we believe a royalty break is not the quick and easy solution to help your franchisees and their struggling businesses, we promote a more healthy, consistent and mutually beneficial ongoing relationship with your franchisees for the best results.
We at Franchising Plus can assist you not only with our training for field service roles but also with our expertise and experience in guiding you to help your franchisees achieve success. Contact us for assistance.