Hey everybody,

This is a question I get constantly: how do I know if a franchisor actually has my back?

There are plenty of horror stories. It’s a question worth asking.

Because it’s not obvious until you're in the weeds, but: your franchisor's incentives and your incentives are not automatically the same.

They can be aligned. They can also be very misaligned. 

And you need to know the difference before you sign anything.

Franchisors make money on gross revenue. They take a royalty, usually 5–8%, off your top line.

Franchisees make money on unit-level cash flow. What's left after you pay rent, labor, supplies, and of course, that 5–8% royalty.

You can probably see the conflict already.

Here's a simple example. Let's say McDonald's decides to run a nationwide price drop on Big Macs. Suddenly they're selling 10x the burgers. Gross revenue goes way up, and McDonald’s corporate gets their cut. 

But for the franchisee, their costs just exploded. They need to buy 10x the ingredients, pay for extra labor coverage, their machines get extra wear and tear… and their profit margin just got slashed. 

That's misalignment.

(Of course, McDonald’s is too smart to screw their restaurants like that. But they have put limits on how much franchisees can charge.)

The big question, though, is: how do you spot this kind of thing ahead of time?

Price controls without regard for costs. But if your costs keep rising and you can't adjust prices to match, guess who eats the loss? Not corporate.

Subway learned this the hard way with the $5 footlong. Great volume; brutal margins. Franchisees went under.

Cannibalization. In other words, locations too close together. If locations are too squished together (or corporate-owned stores are popping up nearby), that’s a sign that franchisees are paying the price.

Shiny objects. When corporate is pouring resources into new ventures while existing franchisees are struggling, that tells you where you rank. If your franchisor is off chasing spinoffs and side projects, ask yourself: who's focused on making my business work?

(I’ve got opinions on KFC launching their concept restaurant “Saucy”.)

Pricing that reflects reality. A McDonald's in midtown Manhattan will cost more than one in rural North Carolina. To account for rent, labor costs, and competition, a franchisor should let you price according to your local market.

Territory protection backed by data. Good franchisors use demographic data to figure out where new locations can go without cannibalizing existing ones. They're not just eyeballing a map. They're protecting their franchisees' ability to succeed.

A franchisor that says no. This one's counterintuitive, but hear me out. A franchisor that's willing to turn down bad-fit candidates is a franchisor that actually cares about system health. 

If they'll let anyone in just to collect a franchise fee, that's a red flag.

Focus on franchisee profitability, not just unit count. The best franchisors understand that their long-term success depends on your success. The worst ones forget that the moment the ink dries.

One way: call up some franchisees and ask them. This is one of the most important steps in your research process (more on that here).

Another way: talk to a franchise consultant like me. It’s literally my job to know this stuff (or find it out).

I recommend doing both.

If you’re serious about buying a franchise, book a time and let’s talk. You don’t have to know which one you want – talking through your goals and finding a fit is all part of the process.

Connor