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Typically, it&rsquo;s not the sales team&rsquo;s fault that many franchisors budget around fee success. It&rsquo;s just not. Someone toward the top of the organization sets a goal (typically created with limited data) and places extreme pressure on the franchise sales team to go accomplish that goal.

But, for brands that will sell someday (and, let&rsquo;s not forget, every brand will have an event), this is the wrong way to look at things. Why? The value of your brand will be built on:

<ol>
	<li>EBITDA</li>
	<li>EBITDA from royalties</li>
	<li>Royalties from franchisees</li>
	<li>Franchisees who are successful drive more royalties</li>
</ol>

Fees are not magical numbers, either. Fees come from qualified franchise prospects who decided to buy your brand (hooray). But getting those fees is not as simple as spending $10,000/per deal in marketing and signing that franchisee. Let&rsquo;s pretend that every checkmark is worth an additional $5,000 in cost to push through prospects:

<ol>
	<li>You are an emerging brand (under 50 locations)</li>
	<li>If you take a good look in the mirror, you know your unit level economics are not superior in the category</li>
	<li>Validation is less than 80 percent</li>
	<li>If asked, your top performers would say hold on buying the brand</li>
	<li>&nbsp;You have battled a public crisis within the last 24 months (if you look in Google News, it isn&rsquo;t all clean)</li>
	<li>It&rsquo;s taking you more than a year to find real estate and build out the location</li>
</ol>

That&rsquo;s just a starting point. As you can see, your costs to get those &ldquo;fees&rdquo; will increase significantly based on your brand&rsquo;s market conditions. Leadership needs to assess the brand before setting growth goals &ndash; or, set growth goals with a budget that is fair in supporting the sales efforts.

Now, let&rsquo;s look at the value of that deal. We will use $30,000 as the number, even though the broker community has driven franchisors to increase their fees (which, in turn, are the franchisee&#39;s responsibility, now &ndash; a whole other story).

If the AUV is $1m annually and the royalty is five percent, then we can look at numbers around five deals:

<ol>
	<li>Five Deals: $30,000 x 5 = $150,000</li>
	<li>Five Deals that hit AUV will be at $5m in gross revenue to the franchisees and $250,000 to the franchisor</li>
	<li>If those five deals remain in the system for five years (even though it should be 10) and average the AUV over that time, then the number turns into $25m x 5 Percent Royalty which = $1,250,000</li>
	<li>When going to sell, you should get futures on that royalty, too</li>
	<li>Let&rsquo;s say two of those buy another unit. That&rsquo;s another $10m x 5 Percent = $500,000</li>
</ol>

So, do you really want to chase the fee?

What happens when you chase fees?

<ol>
	<li>The sales team is pressured to do deals. When pressured to do deals, they will sell franchises versus develop franchisees.</li>
	<li>When you sell franchises (even though we are talking a HUGE life decision), you will convince the wrong people to join your franchise.</li>
	<li>When you get the wrong people to join your franchise, they won&rsquo;t validate.</li>
	<li>When they don&rsquo;t validate, your costs go up.</li>
	<li>Other franchisees become disgruntled.</li>
	<li>Your staff becomes frustrated by these mean franchisees.</li>
	<li>Your brand is another brand that didn&rsquo;t hit its goals.</li>
</ol>

And so on.

So, here are my truths:

<ol>
	<li>Franchise fees are meant to cover the costs of opening a franchise. If you are increasing these fees to just pay the broker, you better come up with a good story for why. Franchisees think they are paying for the franchise. Few are honest and say it&rsquo;s for the broker &ldquo;coaching&rdquo; that took place (that certainly has value, we are simply talking transparency). Make your franchise fee scalable with the lifecycle of your brand. Don&rsquo;t hike it up. Don&rsquo;t allow it to be a hurdle in the development process.</li>
	<li>Good franchisees are better than bad. Bad will cost you a crap load. Be smart about who you let into your system.</li>
	<li>If you sold five franchises last year, don&rsquo;t ask your sales team to sell 20 this year. It won&rsquo;t work.</li>
	<li>Give your sales team the right budgets. And, the right budgets will change &ndash; meaning, other pieces will play into the sales process.</li>
</ol>

Brands that are royalty focused are typically the ones you hear about selling for a ridiculous multiple. Why? Private equity is not made of dummies. Better brands sell for more.

Don&rsquo;t build a fee-based business, build a brand. Great things will come to those who do.

Nick Powills: Royalties are Greater Than Fees

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