Franchise Alignment, Part 1: Getting the Dollars to Make Sense

"Incentives are the most powerful force in the world." —Charlie Munger

Franchise success often starts with a simple question: do the numbers work—for both sides?

This is the first post in our Franchise Alignment series, where we explore the four types of alignment that drive sustainable success: Financial, Reputational, Contractual, and Philosophical. And we’re starting with the most tangible—and often misunderstood—dimension: financial alignment.

What Is Financial Alignment?

Financial alignment means both the franchisor and franchisee can thrive under the same business model. The unit economics must work for both sides—consistently, predictably, and fairly.

When it’s aligned, it creates a powerful growth engine. When it’s not, one party can thrive while the other flounders.

Different Revenue Models, Different Stakes

One reason alignment is tricky? Franchisors and franchisees make money in fundamentally different ways:

• Franchisors typically earn from upfront franchise fees and ongoing royalties based on revenue, regardless of whether a store is profitable.

• Franchisees, however, only win when there’s actual profit left over after rent, labor, inventory, and local marketing.

That means a location can be “successful” in the franchisor’s eyes—even if the franchisee is underwater.

The Expansion Trap

This structural gap shows up most clearly during expansion.

Franchisors are incentivized to approve new stores because each one adds to their top-line revenue—even if it’s a marginal or risky location. That store generates fees and royalties either way.

In theory, franchisees are responsible for doing the local research and evaluating if a site will work. But in practice, many assume the brand wouldn’t greenlight a bad deal. Transparency into how similar markets are performing is often limited—or absent.

The result? Franchisees sometimes end up shouldering all the risk in markets where the economics were shaky from the start.

Case Studies: When Financial Alignment Breaks Down

🟡 Ray Kroc & McDonald’s

In The Founder, Ray Kroc’s early expansion efforts were financially unsustainable. His original agreement with the McDonald brothers gave him just a small cut of sales—nowhere near enough to support national growth. His fix? He created a separate real estate company to buy the land under each franchise, giving himself long-term control and income outside the original agreement.

The result: Kroc scaled McDonald’s into a global powerhouse, and the McDonald brothers—while financially compensated—lost control of the very business they created.

🍩 Krispy Kreme’s Growth-at-All-Costs Strategy

Krispy Kreme franchisees were doing well—so corporate leaned in, pushing rapid expansion and opening company-owned stores near franchise locations to boost revenue. The stock price soared for a while, but the system began to collapse under its own weight.

Without strong financial guardrails and profit discipline, the brand overbuilt. Store cannibalization, weakened unit economics, and strained franchisee relations followed.

📌 Blockbuster vs. Blockbuster Online

As streaming emerged, Blockbuster launched an online service—but gave no cut to franchisees. Meanwhile, store traffic declined and revenues dropped. Franchisees lost, even though they bore the operational costs for a fading model.

🥪 Subway’s $5 Footlong Campaign

The $5 Footlong was a customer favorite, but many franchisees lost money on every sale—especially in high-cost areas. With a national campaign in full swing, opting out wasn’t really an option.

Hidden Fees and Unexpected Costs

While the core revenue model might seem straightforward—franchise fee, royalties, and maybe a marketing contribution—many systems include contractual clauses that create additional revenue streams for the franchisor. These can include:

• Markups on required supplies or inventory

• Technology or POS system fees

• Mandatory training or conference attendance

• Shared service or “support” fees with vague value

These aren’t always unreasonable, but they do shift more revenue to the franchisor—often without franchisees realizing just how much those fees will eat into margins. It’s a reminder that financial alignment isn’t just about royalties—it’s about everything in the contract that affects who profits from the operation.

When It Works, It Really Works

To be clear, franchising works because most of the time, incentives do align. When a franchisee grows, the franchisor earns more in royalties. When stores succeed, the brand grows stronger.

But that alignment doesn’t happen by accident. And it doesn’t stay aligned without effort.

Franchisees must:

• Understand the real economics of the business

• Vet the model in their specific market

• Be alert to where financial misalignment can creep in—whether through fee structures, pricing mandates, or unchecked expansion

Franchising isn’t just buying a job. It’s entering a long-term financial partnership. And like any partnership, the math has to work on both sides.

That’s why we built PeerView AI—to bring more transparency to local market performance and help prospective franchisees evaluate financial alignment before signing on. Because flying blind in a franchise decision is never a recipe for success.

So What Is the Right Fee Structure?

There’s no one-size-fits-all answer—because what’s “right” depends on two things:(1) the industry you’re operating in, and(2) what the franchisor is actually delivering for those fees.

A Quick Service Restaurant (QSR) franchise with low margins and high volume will have very different economics than a high-touch service business like tutoring or home healthcare. And even within the same industry, two franchisors might charge similar royalty rates but offer very different levels of support, brand value, or technology infrastructure.

It’s not just about the number—it’s about what you’re getting in return.

We’ll be diving deeper into this in future articles, including:

• Benchmarks by industry

• Breakdown of what’s typical vs. questionable

• Real-world examples of good (and bad) fee structures

• Questions every prospective franchisee should ask before signing

So stay tuned. Because understanding the fee structure isn’t just about doing the math—it’s about seeing the full picture of financial alignment.

One Last Thought: Don’t Do This Alone

If you’re evaluating a franchise today, don’t go it solo. Reach out to people who’ve been through the process—current franchise owners, franchise consultants, your lawyer, even the franchisor themselves—and see if they’re asking the same hard questions about alignment.

The best partners won’t shy away from those conversations. In fact, they’ll welcome them.

Because when both sides are committed to alignment, the odds of long-term success go way up.

Next Up: Part 2: Reputational Alignment — When your name is on the sign, their mistakes become your problem.