I received this email the other day from Goin’ Postal. Goin’ Postal is rather unique in that it charges franchisees a flat monthly royalty payment of $315 for 2009, regardless of gross sales, and that rate increases annually at 5% per year.
So in 2009, if you had gross annual sales of $250,000, your royalty converted to a percentage was effectively 1.5%. In the email, it details plans to peg the royalty for new franchisees based upon a rate indexed to inflation even though it already increases the royalty 5% each year.
This will add a few thousand dollars of additional expenses when other expenses are also increasing, but given the overall lower royalty system it shouldn’t be a deal killer.
From a public relations perspective, I would have expected this email to include a plan to assist franchisees in harder economic times, rather only stating how we’re going to increase your costs when times are toughest.
———————————————————————
We would like to take this opportunity to let everyone know that sometime in the very near future our royalty system may be changing slightly for new franchisees.
As the country starts to pull back out of the recession and the government implements its stimulus packages, we are almost guaranteed to see some major inflation which will seriously devalue the flat rate royalties that we charge our franchisees.
While we will keep our flat rate royalty system going forward, instead of increasing at a flat 5% per year, our royalties will increase at a rate indexed to inflation (or 5% if inflation is under control), then rounded to the nearest $5.
Franchise Agreements that are already in place are not subject to change, but we are currently working on the new FDD/Franchise Agreement that will be uploaded to the site sometime as soon as we see inflation start to increase.
?While our royalties will still be the lowest in the franchise industry, this will make a difference to future franchisees that sign up after the change, so we wanted to let everyone for those that are close to signing up.
Below is a table to show the small difference with some estimated annual inflation numbers.
|
Current Royalty Structure |
|
|
Royalties w/ indexed increases |
|||
|
Calendar Year |
Increase |
Monthly Royalties |
|
Calendar Year |
Increase |
Monthly Royalties |
|
2009 |
5% |
$ 315.00 |
|
2009 |
5% |
$ 315.00 |
|
2010 |
5% |
$ 330.00 |
|
2010 |
15% |
$ 360.00 |
|
2011 |
5% |
$ 345.00 |
|
2011 |
20% |
$ 430.00 |
|
2012 |
5% |
$ 360.00 |
|
2012 |
15% |
$ 495.00 |
|
2013 |
5% |
$ 380.00 |
|
2013 |
12% |
$ 555.00 |
|
2014 |
5% |
$ 400.00 |
|
2014 |
7% |
$ 595.00 |
|
2015 |
5% |
$ 420.00 |
|
2015 |
5% |
$ 625.00 |
|
2016 |
5% |
$ 440.00 |
|
2016 |
5% |
$ 656.00 |
|
2017 |
5% |
$ 460.00 |
|
2017 |
5% |
$ 690.00 |
|
2018 |
5% |
$ 480.00 |
|
2018 |
5% |
$ 725.00 |
|
2019 |
5% |
$ 500.00 |
|
2019 |
5% |
$ 760.00 |
|
2020 |
5% |
$ 525.00 |
|
2020 |
5% |
$ 800.00 |
|
2021 |
5% |
$ 550.00 |
|
2021 |
5% |
$ 840.00 |
|
2022 |
5% |
$ 575.00 |
|
2022 |
5% |
$ 880.00 |
|
2023 |
5% |
$ 600.00 |
|
2023 |
5% |
$ 925.00 |
|
2024 |
5% |
$ 630.00 |
|
2024 |
5% |
$ 970.00 |
Thank you
Marcus Price
CEO. Goin’ Postal Franchise Corporation
4941 4th Street
Zephyrhills, FL 33542
Ph: 813-782-1500 x103
Fx: 813-782-1599
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Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
I would not want to be franchisee in a system where the royalty is that low. Even franchisors that charge large royalties go bankrupt. It’s simple math, and without funds to support the franchisees in their grand opening and ongoing advice and visits, then the whole system suffers. A big job of the franchisor is to police the franchisees for quality levels and adherence to the franchise agreement, and that costs thousands each year for each franchisee. But, if you want a crap system with crap franchisees and crap support, then go for the cheapest royalty you can find.
I agree with the anonymous poster, franchise fees which are flat rates without regard to gross sales are generally unsuitable. A royalty fee should reflect the costs of maintaining the trade mark, with a reasonable profit margin, including training and support. If the franchisor gets nothing, then no support, training or quality control can be maintained. A low flat franchise fee is a false economy, which should signal to the franchisee that the franchisor cannot afford to support them.
I’d like to expand a little on this post.
We are increasing thr royalties but only due to possible inflation, and only for new franchisees that sign up. While we provide excellent support for the low royalty we charge, we ARE a business and that $315 in todays dollars provides a small profit at the end of the month. However, suppose inflation next year was 100%? Now our royalty would be worth half of what it is today, while the franchisees sales would increase 100%. My payroll will increase, my utilities will increase, so royalties have to increase, but still only for new franchisees. Our system is still by far the best value in the industry.
To the second poster. What you charge for royalties has no bearing on the quality of support you can provide. Look at the companies with the biggest problems now and they all charge massive royalties. With our flat fee we provide:
1. Onsite reps for openings
2. Onsite support and backup when neccesary
3. 6 Toll free support lines
4. 24hr Cell phone support
5. Online tech support
6. Hardware support and replacement
7. Ad slicks
8. Marketing materials
9. Constantly updated proprietary software that beats any other piece of shipping software on the market.
10. And lots of other stuff….
If doesn’t have to be expensive to be good. The difference is, we don’t have a 3 story glass office building with a gym. We don’t have a private jet. When the recession hit, I was the first to take a paycut so support wouldn’t suffer. If you look at our competitors their shareholders and principals take MASSIVE profit distributions, whereas the majority of our profit goes back into the company. Huge royalties provide huge profits for the franchisor, thats all.
Our franchisees are as good, if not better than anyone elses, and we police them as neccesary, and they police each other. We built our system on a mutual respect and trust basis, instead of big borther, little worker, like everyone else.
Mr. Price sounds very nice. Next time I’m in Z-hills, I’ll join him for a beer. I agree that, while overhead for the “zee” increase with the gross sales(labor esp), overhead for the “zor”(advertising, policing concepts etc) do not… proprortionately. The zor overhead increases with new territory, new franchises and so on. Flat rate royalties indexed to inflation seem rather reasonable to me. Why should a successful franchisee pay more than a lower sales franchisee? They both, in theory, receive the same benefit/support from the franchisor regardless of their gross sales.
I would rather see going postal with a $5000 franchise fee and higher royalty. Having that extra $12,000 in reserve would be more important in startup. The risk is also more shared.
wrote on April 23, 2009 @ 12:35 pm:
I agree with Mr./Miss/Ms./Mrs. Anonymous.
I do NOT agree with Polk. I’d rather pay a slightly larger fee up front where it is deserved (since most franchisees need a lot of hand holding in the beginning), as opposed to each month where it is not deserved (since most franchisees quit need a lot of hand holding).
I think the real question is why other franchises charge a royalty. I would never agree to that as a franchisee. Reminds me of leasing space at a mall — they want a percentage of your revenue. That isn’t right.
I find the Goin’ Postal philosophy refresing. Good job Marcus! Best of luck to you and the GP family.
I still don’t get people claiming they would rather pay higher royalty fees. Maybe I should go to my landlord and offer more rent/cams in hope thet she will improve the grounds. Better yet let me offer the insurrance co. extra in the hopes that they will treat me better in time of need.
In most franchise situations, I don’t see the individual franchisee’s sales impacting in any way the overhead of the franchisor. It is a myth. Successful stores will lower the zor’s overhead by encouraging new franchises to be bought etc.
A big thumbs up to flat royalties based on realistic support levels and services required.
Besides, there are many instances of higher royalties being charged for new franchises, special deals and multi-store discounts.
wrote on May 13, 2009 @ 10:17 am:
Okay smart guy should McDonald’s convert to a flat fee royalty? If McDonald’s had begun on a flat fee royalty structure at its inception would they be the brand they are today?
The franchisor owns the brand and they have every right to maximize value and profits on a percentage basis. It is their incentive.
Okay smart guy should McDonald’s convert to a flat fee royalty? If McDonald’s had begun on a flat fee royalty structure at its inception would they be the brand they are today?
The franchisor owns the brand and they have every right to maximize value and profits on a percentage basis. It is their incentive.
Ok, I’m busted. I’m a “smart guy.” For the McDonalds example, I could counter with the thousands of unsuccessful franchises ruined by the 5-8% the zor demands off the top for doing little for it. I would prefer the zor to suggest advertising fees should rise for a new campaign for example. Call it what you like, but the cost to the zor for a “supporting the brand/system” does not increase relative to the same store sales of a successful franchisee.
The universal truth is the last statement.
maximizing profits is all the incentive I need. Unfortunately, for thousands of franchise systems that have attempted to model the McDonalds fee structure, have not followed their operations excellence, market research, menu science etc. In most cases, royalties as a percentage of sales enrich zors at the expense of and detriment to the franchisee.
Granted, royalties work as a win-win in some situations, but on the whole I would argue it is rarely win-win. And for most ethical folks, the best business deal is the deal in which both parties are enriched.
Thank you for the non-answer, coward!