“A royalty cap is a must for a wise franchise investment.”
The virtues of franchise ownership are plenty from corporate support, to national buying power, to a proven system of operations which, if done well, can be the vehicle by which you travel to the not-so-distant land of your entrepreneurial dream come true. Some franchises are well-known and respected due to the many years of dedication to the task of building a brand worthy of the investment of their many franchisees. Others are untried and new with just a few active locations out there to play the role of “canary in the mine” (a role you do not want to play).
Of the thousands of franchise opportunities out there, the question of their value is likely the first that you will ponder; and the value of anything (including a franchisor) is frequently a matter of perception based on personal objectives. Naturally, you need to believe that the royalties that must be paid to your franchisor are fair and justified so you can get to work on what matters, the progression of your franchise and the chance to reach satisfying milestones as an entrepreneur.
Finding a worthwhile franchise opportunity among businesses for sale can be such a gift to a motivated entrepreneur with the chops to apply discipline, enthusiasm and business intelligence to the good use of a proven system of operations, one that has helped redefine the lives of thousands of franchisees over many years and many continents, in some cases. Your franchisor should provide a lifetime of training and support (even at the local level) and invaluable brand recognition, all from day one. In exchange for such advantages, you provide a franchise fee and royalty payments that are paid on a regular basis and determined in a variety of ways, depending on the nature of your franchisor.
Bob Ylinen, Minuteman Press International Regional Vice President for Northern California and Nevada identifies the things you should be looking for in terms of real value in exchange for the royalty fees you will be paying as a franchise owner, “What the franchisee needs to look for is an incentive to reinvest profits back into their business. With that said, seek out a franchise model that creates that incentive, one that favors a franchisee to grow his or her business by having a cap on the royalty.”
A royalty cap is a must for a wise franchise investment and here are 2 reasons why:
1. First, it becomes a fixed expense once they achieve the royalty cap.
2. Second, it becomes less of a total expense as they continue to grow their sales and a royalty cap creates that incentive to reinvest the savings back into their business.
Bob advises, “Look for a franchise model that allows you to invest in marketing your business locally rather than globally.”
On top of the provisions you will get from a loyal partner in your franchisor, obviously this is also how the franchisor keeps growing and gaining momentum within the market. This growth is necessary for the good of all franchisees who depend on brand strength, support, training and incentives in order to build their own businesses to great heights. If the franchise system is structured in a healthy way, royalties support its continued development and both the franchisor and the franchisee will be in a position to collect a fair return on their investment over a reasonable period. Done the right way, franchising should make everyone happy by providing a unique edge over new, untested, unsupported business opportunities.
You must realize that franchisors vary greatly in their value and insist upon that fair return for your own investment. It is not uncommon for a franchisor to overcharge their franchisees, provide limited or weak support that is little more than sales-pitch window dressing and fail to even consider something as favorable as a royalty cap. The last thing you need is to make a hasty selection and find yourself with an inferior royalty charge, among a population of fellow frustrated, disenchanted franchisees who realize a franchise rip off only in retrospect.
“A royalty cap is far more practical than traditional royalty payment structures. When there is a fixed percentage of sales, unfavorable scenarios can develop where the higher the sales, the more the franchise owner pays in royalties” adds Nick Titus, Vice President of Marketing for Minuteman Press International. He cautions, “There can come a point at which the amount of royalties a franchisee pays outweighs the value of what they receive in support.”
On a bright note, Nick adds, “If you select the right franchisor, the partnership will be refreshingly equal to (or even outweigh) the amount of royalties you pay.”
Keith Cawley, Minuteman Press Regional Vice President in the Heartland Region, can attest to the fact that fees and costs associated with franchise ownership are not always fair and reasonable. In fact, frequently, people need to conduct a careful franchise review in order to avoid the assumption that the fees reflect the true value of the franchisor. As a guideline during your own investigations, Keith says the following, “There are several things to evaluate which franchise offers the best avenue to success and the investigation stage should reveal them.”
Since the franchisor he represents is a well-respected, B2B services industry leader, Keith is in a perfect position to present an example of elite-level franchising. He welcomes them to tour active franchise locations, speak to franchisees who are able to be honest about the challenges and the triumphs of this entrepreneurial venture. In this way, prospective Minuteman Press franchise owners have a real picture of the life they could build for themselves within this time-tested system.
Keith is also on-hand with the truth about what makes his franchisor distinguished among the many options and why so many thousands of professionals have enthusiastically signed their franchise agreements and have gone on to build memorable careers as Minuteman Press franchise owners. As he says, “We provide local support which is not to be taken for granted. Most franchises are simply not there for you in the same way after the initial set up. You might get an 800 number and if you need help on site and it is not uncommon to get that help at your own expense. This is not the case with Minuteman Press International. Also, the royalty incentive program is a huge plus for our franchisees. This royalty cap was put into place by founder, Roy Titus, because, in life, when you are successful at something you should get rewarded. This doesn’t happen with other franchises. In fact, you are actually penalized for success by paying more royalties in many cases.”
Royalty structures vary and so does the value you get for them
There are many ways that royalty fees are structured and paid and there is not necessarily a direct correlation between franchise cost and its actual worth to you (which is why you need to put these franchisors under a microscope to find the best one). Still, these fees not only keep the entire franchise system in business, they also allow the franchisor to take care of continuing services you will need. Without royalty fees in some form, it wouldn’t be possible to support the brand properly and that would be a detriment to all franchisees. The mission you take on when you decide to become a franchise owner is to pull the covers back to see beyond the sales pitches and look for true value.
“Our royalty cap was designed to incentivize our store owners to put the savings back into their businesses. Invest the savings in advertising and more marketing efforts for the chance to realize more profitability,” notes Rich Hornberger, Minuteman Press Regional Vice President in Philadelphia. Rich continues, “We don’t have any additional royalty fees on marketing or advertising, so that in itself reduces the total amount of royalties they have to pay which puts it back into the business coffers. Not only do we not have a flat royalty with no additional marketing royalty but we also employ a royalty cap that is unique to franchising, allowing those additional savings to go back into the business for advertising and marketing.”
The type and amount of royalties you pay as a franchisee directly impacts your ability to get ahead as a business owner. The important thing to remember is that with royalties, you will not necessarily get what you hope you are paying for. Each franchisor is different and the assumption of worth is a dangerous one for your investment.
There are franchisors who will provide limited support and training, bury that fact in their sales pitches and then overcharge for it. The good news is that in the best cases, you will find franchise for sale opportunities with advantages such as royalty caps and a lifetime of training and local support. Those franchise corporations are the true leaders of industry and the standard by which you should assess all of your choices. If you do, yours will be a franchisor with ethics and a corporate culture that honors the growth and longevity of each of its franchisees.