How can you prepare for franchise fee and royalty increases?

To prepare for an increase in the franchise fee and royalties, the first step is to develop a rationale for this increase. We always analyze our growth points to assess the necessity of raising mandatory payments. For instance, we discuss how to enhance the efficiency of our operational processes, automate business processes, and optimize transportation flows and pricing. If we determine that an increase is inevitable, we strive to provide our economic justification to our franchisees and offer some favorable conditions—such as a phased increase, payment holidays for a certain period, and so on. This way, the increase in our payments occurs as smoothly as possible for our franchisee

To prepare for franchise fee and royalty increases, follow these steps: 1?? Review Financial Impact: Assess how the increase will affect your profit margins. Analyze cash flow and expenses to understand the financial impact and identify areas for cost-cutting. 2?? Boost Revenue Streams: Focus on increasing sales and diversifying income by expanding product offerings, improving marketing efforts, or exploring new revenue opportunities. 3?? Negotiate Terms: Open discussions with your franchisor to explore flexible payment terms or phased increases to ease the transition. 4?? Plan Ahead: Incorporate potential increases into your long-term financial planning to ensure stability and avoid surprises.

Franchise fees are upfront payments made by a franchisee to the franchisor to purchase the right to operate a franchise. Royalties are ongoing payments made by the franchisee to the franchisor, typically a percentage of monthly or annual sales. Franchise fees and royalties are used by the franchisor to support the franchise network and provide services such as training, marketing, and operational support. The fees and royalties vary by franchise. These payments allow the franchisor to maintain control over the brand and ensure consistency across all locations.

Preparing for franchise fee and royalty increases starts with understanding why these costs rise. Franchisors often increase fees to fund brand development, enhance marketing, adopt new technologies, or improve training and support services—all of which can boost your business's success. Economic factors like inflation, rising operational costs, and market competition can also necessitate fee adjustments. To prepare, analyze your financials to accommodate potential increases and identify areas to optimize expenses. Engage in open communication with your franchisor to understand the value added by the increased fees. By staying informed and proactive, you can adjust your business strategies to maintain profitability despite higher costs.

I have worked with several clients to increase their royalties. Some of these were stuck with fixed royalty structures dating back to the inception of their franchises and realised as their franchisees' businesses had grown that they were still receiving the same low fixed amount. We manage to persuade the franchisees that it was fairer to switch to a percentage royalty so the franchisors could benefit equally in the growth of the overall franchises.

Franchise fee and royalty increases that come out of the blue or are unjustifiable will always damage the relationship of openness and trust that should ideally exist between franchisor and franchisee. Because franchise disclosure documents and franchise agreements are complex and most prospective franchisees are not familiar with legal documents, you as a franchisee may not pick up on any provisions for future fee and royalty increases. It's important to check for these with both the franchisor and your lawyer before signing the franchise agreement.