Putting a limit on Franchise Royalties

I had an interesting conversation with a young franchisor yesterday.

“You mean, you actually put a cap on your franchise royalties?” I said.

“Yep, we limit the amount our franchisees pay us” he said.

“Err… are you sure that’s such a good idea?”

He then went on to explain, “By the time they hit the cap, they’ve got their business running really well. We’ve done alright out of it. I’m happy for them to keep the cream.

If they go on to exceed the cap, it’s all theirs. Their reward.”

I like it. This young franchisor has his head screwed on. He’s got a strong emerging brand which is doing really well.

“It’s all about the franchisee.”

He said the cap builds incredible brand loyalty and when renewal time comes, they sign up 100%.

I’m curious to hear other thoughts on the capping of franchise royalties. Also the impact it has on:

• Franchise retention / renewal

• Conversion of prospects

• Financial impact for both the franchisor and franchisee

Peter