By Sasha-Lee de Bod

Times are tough in any independent business environment and expenses continuously pile up, but when you own your own franchised business you need to take additional management service fee/royalty expenses into account and plan/budget for it.

Some franchisees might be skipping their payments if they aren’t monitored correctly by the franchisor and this will influence the franchisor’s business operations and the capability to support the franchisees effectively.

Now the question we need to ask ourselves as franchisors is why does it happen and how do we avoid it?

How does it happen?

There are a number of reasons why franchisees are not paying the franchisor:

  • Current economic environment:
    • Franchisees might be stressed and strained due to decline in customer spending behaviour in tough economic times
    • Cash flow issues exist in most businesses
    • Expenses are increasing
    • Debt is piling up in businesses and it is to keep the business afloat
    • They do not have cash flow to pay for it
  • Unclear payment terms and conditions:
    • Franchisees don’t remember when to pay
    • What are the payment terms and period, are they monthly, quarterly? This might be confusing to franchisees if its not paid on a regular basis
    • Franchisees are unsure of how much to pay and don’t know how to calculate the amount due. Management service fee is normally expressed as a percentage of total sales, if a franchisor states they need to pay a 6% management service fee they would need to pay 6% of total sales to the franchisor.
    • Some franchise models use a sliding scale for turnover categories and franchisees might not know where they fit into it all (we do not recommend this method)
  • Franchisees have the authority to decide what bills gets paid first in their business e.g. do we pay electricity and rent, or do we look at other expenditure obligations?
  • At times the franchise fees get pushed down on the priority list due to franchisees feeling that there are more important things to pay or just believing they can get away with it – this might be seen as a grudge payment: “What are we really getting in return for this”?

The result and effect

When franchisees don’t pay management service fees on time this has an effect on the franchisor’s head office and support infrastructure. The incoming amount budgeted for management service fees are less than expected which affects the head office overall financial position.  Expenses and overheads need to be settled which can also put strain on the head office structure.

Management service fee income is mainly utilised for ongoing support to the franchise network, if little or no money is generated the quality of support is negatively influenced, which in turn results in the entire network suffering for a prolonged period.

How franchisors can avoid this from happening

  • Franchisors can implement a minimum debit order or stop order amount to the franchisee’s account to ensure that some form of payment will always be secured each month. The remainder of the amount will need to be topped up by a certain time, as specified in the agreement. This will assist the franchisor head office to budget and plan accordingly to ensure that there is a continuous management service fee income flow.
  • Do not offer any franchisee management service fee breaks in tough times! If one franchisee is being given a break, all the other franchisees will expect it as well. Rather invest the paid management service fees back into the franchisee’s business through:
    • Area managers/field service consultants need to continuously assist franchisees, even more so in tough times with financial analysis and monitoring of expenditures
    • Local marketing assistance
    • Buying additional stock
    • Assisting with additional staff if they needed to cut back
    • Ongoing communication and regular visits.
    • Quality control.
    • Ongoing research and development in all aspects of the business format system, product range and services.
    • Additional training for the Franchisee and the Franchise staff.
    • Technical and operational support
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