COVID-19 and the Transformation of Direct Selling
Fast Tracking Royalty Self-Sufficiency with Improved Training
Many franchise networks put all their attention to selling new franchises and expect existing franchisees to grow on their own. However, such strategy is known to produce fewer results in the longer term. There is a reason why there is a word “management” in the “franchise management” definition. Growing simply on the initial revenue generated from franchise fees alone cannot be a sufficient growth strategy.
This, however, is a short-sighted approach and it ultimately results in failure. What, then, is the truly sustainable pathway for effectively managing your franchisees? The answer is simple. Your goal as a franchisor should be to achieve royalty self-sufficiency as quickly as possible.
What Is Royalty Self-Sufficiency and How Is It Calculated?
The book “Grow Smart, Risk Less” states: “As a franchisor, the most important achievement in your life cycle is the point at which you reach royalty self-sufficiency, the point at which all overhead costs are covered by royalties and there is no longer pressure to earn franchise fees.”
To calculate that point correctly, subtract all your operating expenses for all functions (other than franchise sales) from your royalty revenues. If revenues exceed expenses for all operations other than franchise sales, you have reached royalty self-sufficiency.
If, on the other hand, revenues do not exceed expenses, you have not yet reached royalty self-sufficiency and your franchise management strategy must be amended to include methods to achieve that goal as quickly as possible.
Impediments to Royalty Self-Sufficiency
Franchise royalty payments differ by industry and are partially determined by the normal profit margins for each type of business. Entrepreneur estimates that most business format franchises have a royalty percentage somewhere between 4 and 6 percent of gross sales.
From the standpoint of a franchisor aiming at royalty self-sufficiency, then, it is imperative that franchisee operations come up to speed quickly and begin generating a steadily growing revenue stream sooner rather than later. This is not as simple to achieve as it sounds.
One reason may have to do with the number of franchises one sells. For instance, the book “Grow Smart, Risk Less” notes that the average franchisor reaches the point of royalty self-sufficiency when that franchisor has 100 or so open units. While this number is not etched in stone, it is likely that a franchisor with this many units will begin to see gains in royalty self-sufficiency. This could be one way to reach your goal but it’s an extremely sales heavy road where you can risk the essence and quality of your franchise, thus gaining nothing in the end.
Another reason for a delay in achieving royalty self-sufficiency involves the quality of your franchisees. Franchisees who are top performers consistently generate more revenue and consume fewer resources of the parent company. Conversely, a series of underperforming franchisees will undercut revenue streams and consume more resources. So, it pays for franchisors to carefully consider which franchisees they choose.
The final and the most important factor that impedes a franchisor from achieving royalty self-sufficiency involves a failure to adequately train and support franchisees from day one.
From the standpoint of a franchisee, often the expectation with the purchase of a franchise is that there will be sufficient training and support given by the franchisor for the franchisee to see a profit within a reasonable amount of time and that in turn, the franchisee will quickly become a valuable asset to the parent company.
As MIT Sloan Management Review pointed out almost 20 years ago, the problem is that franchisees are often surprised to find that their expectations are not met. The article notes frankly: “While all investments have an element of risk, many people assume that franchisors are selling a formula for success. However, roughly three-quarters of all new franchise systems fail within twelve years. Since the average initial franchise contract is for fourteen years, fewer than one in four new franchise systems survive until the end of the contract.”
Why Franchisee Training is the Straightest Path to Royalty Self-Sufficiency
A cornerstone of successful franchise management is appropriate onboarding and training for new franchisees. Franchisors must have a solid plan for translating their successful business model to franchisees quickly and efficiently. Why? The reasons are many, including:
- maintaining brand integrity;
- immersing franchisees into an existing corporate culture;
- helping franchisees achieve strong revenue streams.
What happens when franchisors leave this process to chance? FranchisePerformanceGroup.com lays out the results frankly, stating: “Franchisor inexperience leaves the franchisor with ill-conceived or under-developed training and operating systems, poor or ill-prepared operations and support, leading to breakdowns and low-profit margins for franchisees, which in turn creates operational headaches for the franchisor and poor franchisee validation. If the franchisees are not making money and are unhappy, it becomes impossible to attract additional talented franchisees. This pushes the franchisor’s dream of “royalty self-sufficiency” further out into the future.”
The Fast Track to Successful Franchise Management
As a franchisor, what can you do to have successful franchise management operations and get on the fast track to royalty self-sufficiency? It all begins with your franchisee onboarding and training programs. By giving your franchisees the right tools for success and teaching them how to most effectively leverage those tools, you are supporting and strengthening your overall brand as well.
Technology has helped many franchises to quickly reach their profitability goals. When choosing the right solution for your franchise, make sure that you are comfortable with its interface, that the platform supports all the formats of training specific to your business, and that it has explicit tools to monitor your franchisees training progress to maintain brand integrity. If you want to encourage engagement among franchisees you should also look into a solution that integrates gamification tools in the learning process. It’s been proven that gamification significantly improves the quality of learning.
When you chose the right solution for your franchise, it will help you to effectively onboard new locations, provide just-in-time training to your field staff, and promote new marketing and operational initiatives across the field thus paving the way to royalty self-sufficiency.
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