A franchise system that achieves royalty self-sufficiency is essentially earning sufficient revenue from franchisee royalties to cover its operational costs. This milestone varies among franchisors, with some achieving it at 50 open units while others may require 100 or more. It’s important to be cautious of franchise systems that rely on selling more franchises just to meet payroll expenses. Jania Bailey, CEO of FranNet, urges you to dig deeper into the financials and gain a clear understanding of the situation.
Video Transcript –
Royalty self-sufficiency is going to happen at different times for franchisors. Some companies hit it at 50 units open – some it’s more like a hundred. And what that means is if they did not sell another franchise, they are generating enough income from the royalties of their franchisees to cover their overhead.
Now let’s take the reverse of that- they’ve got more overhead than royalties they’re generating. They either have to have an infusion of cash, or some deep pockets behind it, or they’re dependent on that next franchise sale to make payroll. That can be very concerning. So, again, it’s taking the time to get behind the numbers and understand what’s going on.