Laundry Franchising - The Problem with Royalties

On the extreme end of royalty fees, franchisors don't collect them. At the other end, well, there could be a problem too.

Suds started in 2003. By 2005, we have had franchise inquiries but we never took them seriously because of one thing: some of our friends who franchised popular laundry franchises were unhappy with their businesses. And it had a lot to do with royalty collection.

The problem? Royalties are too high. There were instances when they had to give almost ALL net income to the franchisor. In any business, that could be a problem.

Before we understood franchise structuring, we thought that royalty payments were arbitrary. But Jojo showed us that there could be a way for a franchisee-franchisor win-win program. We thought long and hard and came with a ground breaking royalty system - a system that adapts to the gross sales level of the franchisee.

Here's what's good about it:

1. We don't collect for the first 6 months. That's the franchise customer build up stage and it's very critical for them to survive this stage.

2. We start at 3% which is way lower than what our competitors charge.

3. As the franchise's sales grow, we set up trigger points where we increase our royalties to 4% then to 5%.

4. At a certain point, when sales continue to grow, we actually LOWER our royalty percentage as an incentive for good-performing franchises.

All these took a little number-crunching. We had to base it on the projected Profit and Loss of the franchisee taking into account all the expenses first. It's not arbitrary and its main aim is to keep our franchisee happy even if they contribute royalties.

So the next time, the issue of royalties come up, prospective franchisees should not automatically label it a bad thing. Royalties should help both franchisors and franchisees if properly structured.

God Bless!