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Financial Alignment Between Franchisees & Franchisors

Alignment. This is one of those words you will hear very often at your local car repair shop. If your alignment is out, you will find that the steering wheel doesn’t seem to go where you want it to go. Whether it shakes or pulls left or right is really a symptom of what is out of line and how bad. The wear and tear on a vehicle like this is constant, and you will find that tires go more often and the cost of misalignment adds up over time.

Business is very similar, and partnerships require perfect alignment if you want to stop a partnership from becoming a sinking ship. In franchising, it is critical that the franchisees, and franchisors understand each other’s goals, and earnestly put forth best efforts to help each other achieve them. If not, you will find that the direction you want to go will be consistently thrown off by the direction your partners want to go. This wastes both valuable time and resources.

I would like to speak to one major issue in franchise alignment that I have seen come up time and time and again. Every franchisee pays a royalty to the franchisor. This royalty is calculated on the gross sales of the franchisee and is taken off the top regardless of profit levels. The danger in this is some franchisors only look at the top line revenue as the goal, as that is what drives their profitability, while the franchisee goals might be more about what hits their bottom line. This misalignment creates friction in a partnership if both parties are not equally committed to each other’s goals. I have seen some franchisors demand massive investments in marketing and advertising to drive that top line growth, only to see profits erode if not disappear on the bottom line.

When choosing a franchise system, it is critical that an open conversation on this topic is addressed and you feel comfortable that your partner has your best interests at heart.