Death, Taxes and Franchise Royalties

Everyone knows the old saying, “nothing is certain except death and taxes” Daniel Defoe mentioned this in The Political History of the Devil in 1726. Of course, the saying is closer to its present form in The Works of Benjamin Franklin 1817.  Another variation even showed up in Gone With the Wind in 1936.  Many years ago, I heard a franchisee use the phrase “nothing in life is sure but death, taxes and royalties”.  I hope someday to have said something that may be remembered for a couple days, never mind centuries!

Anyway, those of us in the franchise community understand that most franchisees dread paying their royalties.  It is akin to writing a big fat check to Uncle Sam.  Paying for something that has no immediate tangibility is a tough sale mentally. There are however, franchisees that somehow enjoy paying the royalties due their franchisor.  Blasphemy I tell you, how could that be?!!

Franchisees happily paying royalties really can and does happen and it is a matter of simple economics.  Find out who they are in your franchise diligence process. Funny how you cannot have a conversation about franchising and not talk about the money!  I think everyone agrees that at the end of the day, it is always about what the business sends to the bottom line. And therein lies the part of the income statement that makes royalty payments worth it or not.

You see, initial franchise fees cover the costs of the franchisor for setting up the franchise and all the things they do to help a franchisee open their business. Typically, weighing the value of the initial fee is an easy task.  Just ask this question: Could I have developed all these procedures, proprietary marks, programs, services, collateral materials, etc. for less than the franchise fee?  Likely not. This knowedge can be obtained in the diligence process.

The royalty value question is similar but a little harder to nail down, but also can be discovered in a good franchise diligence process.  Does the franchised concept generate more gross income and/or is it less expensive to operate than a similar independently run business?  If the answer is yes AND the bottom line is larger than the royalty being paid, you found a good franchise (and will be happy about paying the  royalty whether you like it or not!).  If the answer is no, “death and taxes” are surely going to find their way into the conversation.