Despite everything you might hear to the contrary, most business coaching franchisors charge a flat monthly royalty (as opposed to a percentage of revenue) for one simple reason: they’re determined to get paid even if you don’t.
Cynical sounding, but absolutely true, I assure you.
In the franchising world, it’s well-known and understood that good, reputable franchise systems survive and thrive based on a win-win business model. Their franchisees make money because the economics of the model make sense. Accordingly, the franchisor deserves to be paid a portion of the earnings. That’s why most reputable, quality franchise brands charge royalties based on a percentage of revenue generated.
Most reputable, quality franchise brands charge royalties based on a percentage of
But what about the business coaching franchise systems where the franchisee failure rate is well above 50%?
Well, business coaching franchisors have developed a great method of making money, even if their business model doesn’t work very well for the average franchisee. It’s called the flat monthly royalty! And because the majority of business coaching franchises have extremely high franchise failure rates, most business coaching franchisors charge a monthly royalty.
It doesn’t take a rocket scientist to realize that a flat monthly royalty of $1,000 to $1,800 is a WIN-LOSE deal. Win for the franchisor, lose for the franchisee.
What their sales reps tell you is that “the royalty fee is set at a flat rate so you’ll be motivated to get out and generate cash flow to become cash positive as quickly as possible.” But if you’re not motivated to be successful already, you’ll fail even faster with a cash burn rate like that staring you down each day.
Percentage-Based Royalties vs. Flat-Rate Royalties
Assuming a $1,500 monthly royalty, the only way you even break even with a flat rate royalty is if you bank $120,000 per year. That’s because $120,000 is the mathematical inflection point above which it pays better to be liable for a flat monthly royalty as opposed to a percentage, assuming a standard 15%.
Your sales reps will do everything they can to help you believe that you’re one of the few who will be on the far right side of the bell curve. And who knows, perhaps you will be. But I always tell my clients that when it comes to financials, you need to plan for the worst-case scenario and work for the best-case scenario.
Quite frankly, a lot of business coaching franchise prospects remind me of folks who play the slots in Las Vegas. You’ve seen them hunched over the slot machines, right? Most of them actually believe they’ll win big if they just keep playing long enough. “I’ll be the one to beat the odds!” they tell themselves.
Make no mistake. Flat monthly royalties are collected by the franchisor to make sure they get paid even if you don’t. This system benefits them, not you!
As you’re researching whether or not to buy a business coaching franchise, please look for options with a percentage-based royalty structure. This will incentivize them to work for their money instead of leaving you on your own to struggle. That’s the win-win approach.
For more important insights into conducting due diligence into business coaching franchises, please download our FREE ebook, The Business Coaching Franchise Buyers Guide.