Franchisor Coaching

Last spring, I had two contrasting meetings in one day. The first, with a franchisor and the second, with a multi-unit operator in the same system. Both convinced the other side was “winning at their expense.” The franchisor pointed to flat royalties despite record marketing spend; the franchisee showed a P&L where rising wages erased the quarter’s profit. Same brand, same data—two very different realities. That gap isn’t about attitude or perspective; it’s about incentives that don’t line up. In a market that’s only getting more complex and competitive for small businesses, franchisors and franchisees are better off pulling in the same direction. But alignment doesn’t happen by accident. It takes transparency, clarity, and education. In this article, we’ll look at the common roadblocks to alignment, the key considerations each side should weigh, and practical steps to move forward together. Two Realities, One System: Why Incentives Feel Misaligned On the day last spring when I had these contrasting conversations, I can’t say it was a surprise. For years, I have had conversations with franchisees and franchisors who don’t feel their financial fortunes are being considered by the other party.  Being a independent third party, I can say I think this is often the truth. Unit-Level P&L vs. Royalty Stream At a basic level, franchisors are primarily incentivized to focus on franchisees’ top-line performance. Many franchisors I’ve spoken with rationalize this by saying their responsibility is to drive sales, while it’s the franchisee’s job to turn those sales into profit. They also point out that they provide resources—training, financial education, and tools—that franchisees often don’t fully utilize. Franchisees, on the other hand, see things differently. While they agree that revenue is the lifeblood of their business, they often feel that franchisors will push for top-line growth at any cost—even if it hurts their margins or workload. In an International Franchise Association survey from 2025, 37% of franchisees cited labor availability, cost, and quality as their top challenge, while only 15% pointed to weak sales. That gap underscores a fundamental truth: while franchisors are often focused on driving revenue, most franchisees are more concerned with operating profitably. Fee Structures Track Revenue, Not Profit A few years ago, at a franchise convention, I was giving a talk to potential franchisees about the financial realities they would face. During the session, someone raised their hand and asked, “Why don’t franchisors base their royalties on profit instead of sales?” It’s a fair question—and one that gets to the heart of franchise economics. A flat percentage royalty tied to sales can easily misalign incentives, especially during low-margin phases. And by “low-margin phases,” I mean the polite version of saying the business isn’t making much money. So, on paper, it seems logical to shift the entire system to royalties based on profit rather than revenue. But there are a few legitimate reasons why that doesn’t work in practice. First, most small business owners do everything they can to minimize taxable income. It’s not that they’re dishonest—it’s that they’re rational. Every dollar in profit is a dollar that gets taxed, so many owners push expenses to the edge of what’s allowable. That makes “profit” a flexible number, and not a reliable basis for royalties. The larger issue is control. Franchisors simply don’t have enough influence over each franchisee’s day-to-day operations to fairly tie their income to profit. They can provide training, brand standards, and marketing programs—but they can’t dictate how a franchisee hires, pays, or retains staff. They don’t set rent, choose every vendor, or manage local advertising budgets. Those operational levers, which heavily determine profitability, are largely in the franchisee’s hands. For those reasons, franchisors are justified in basing royalties on revenue, not profit. Still, there’s room for a middle ground—a structure that better aligns incentives without abandoning practicality. We’ll explore that later. Communication and Compliance Gaps One of the most damaging factors in the franchisor–franchisee relationship is a lack of transparency. While I fully believe franchisors should be creative in developing new revenue streams from their intellectual property, it should never come at the expense of franchisees. If a fee is charged, it must deliver clear value. Opaque or poorly explained fees erode trust faster than almost anything else. This has gotten so bad that in July 2024, the Federal Trade Commission warned franchisors of unfair or deceptive practices. There’s simply no justification for hiding behind vague charges or mandatory programs that don’t provide measurable benefit. Personally, I’ve turned down clients who engage in these practices—it’s not a foundation you can build a healthy system on. That said, transparency isn’t a one-way street. Many franchisors express frustration that large parts of their intellectual property, training programs, and operational systems go unused or ignored. They invest heavily in tools and resources designed to support franchisees, only to see minimal engagement. Over time, this can create a “swim-or-sink” mentality, where franchisors feel compelled to pull back their support or let underperformers fail. On this point, I understand their perspective. I’ve seen countless financial training sessions go unattended and operational best practices dismissed because franchisees think they “know better.” True alignment requires trust—trust that each side will uphold its responsibilities, utilize the tools available, and do everything possible to strengthen their part of the business. Transparency & Trust: A Two-Way Checklist for Franchisors and Franchisees Building alignment starts with clarity. Both sides share responsibility for maintaining open communication, fair expectations, and visible value in every dollar exchanged. Use this checklist to evaluate whether your system’s transparency builds trust—or quietly erodes it. Rewiring Incentives for Alignment One of my favorite exercises to solve a problem is what I call a “blank paper” exercise. Essentially, it starts with defining a problem and then coming up with solutions without being tied to any existing constraints or processes.  So, with that in mind, here three of my “blank paper” ideas. Smarter Royalties A flat royalty doesn’t always align incentives. There are two potential solutions. First, implement a tiered royalty structure tied to