How to collect royalty fees when you franchise your business
One of the immediate questions when considering whether should you Franchise your business is how will you collect royalty payments each month or each week. In one recent conversation the question was asked, is it an honor system? Others have said, couldn’t a franchisee just operate out of a separate checking account, accept cash or have a separate POS system?
The short answer is yes, all of these things could happen, but the longer answer is that with the right structure, support, and systems in place, skirting royalty payments becomes not only difficult but also very risky for the franchisee.
First, it is important to understand that there is no silver bullet, there may be some small percentage of business that comes through where you do not collect royalties. Consider that if you opened company-owned locations, you would still have some degree of loss in the operations with employee theft, operational inefficiencies, and other daily occurrences.
It’s ok to have a small percentage that slips through the cracks, don’t let that get in the way of your big-picture opportunity to scale and grow your model.
Second, franchising is a great business model as you gave the opportunity to grow without needing significant overhead and people to manage your growing number of locations, but it does not remove your responsibility to manage and be engaged in your franchise business.
You as the franchisor need to be involved in your franchisee’s business with regular calls, coaching sessions, and interactions with franchise owners. Building trust, connection, and credibility with your franchise partners is key not only to the entire brand’s growth and success but also to your ability to continue collecting royalty payments.
One franchise consultant told me, it’s like being a parent, if your kids don’t know and trust you, they go elsewhere when they need advice or direction in life. The same is true for a franchise owner, if they don’t know you and your team, they have more incentive to break rules and not pay royalties.
Third, with the ever-increasing availability and access to technology, there are more and more tools to make sure you are efficiently collecting royalties from your franchisees. Having a solid centralized operating system in place (CRM or POS) is critical to franchise your business effectively.
Having access to franchisees’ bookkeeping software and financials is important, either requires that they use your bookkeeper or that they use software like quick books online and you should have access to this. You should have access to your franchisee’s bank records to be able to match against franchise bookkeeping records as well.
And finally, have solid relationships with your vendors and suppliers so you can track against numbers and operating reports. With the right model in place, you have enough touchpoints to understand the numbers and make sure you are being paid the right amount in franchise royalty fees.
For more information on how to set your business up for franchising and how to collect franchise royalty fees, contact us.
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