How to manage overdue payments from franchisees

In today’s economy, businesses, regardless of their size, or whether a public or private company, a franchise network, or a nonprofit organization, must maintain healthy working capital.

F. Georges Sayegh, A.S.D., C.ADM, FCMC, is an expert consultant in franchising and technology transfer. He is also the author of 18 books on franchising and related business. To contact him: gsayegh@gsayegh.com; 

Tel.: (514) 216-8458.

In today’s economy, businesses, regardless of their size, or whether a public or private company, a franchise network, or a nonprofit organization, must maintain healthy working capital. This is essential to ensure expansion, acquisitions, product supply, and payroll obligations.

In a competitive market, franchises are no exception, especially given they already require special attention to ensure the sustainability of their network. Franchisors must focus on the products and services their network offers to customers. They must also continually study pricing, customer communication, and operating processes, which evolve constantly with changing needs. Franchisees, for their part, also fear losing customers to competitors who introduce new products at competitive prices or who simplify their processes—a reality no different from many other industries.

Money can harm franchisor–franchisee relationships. Human nature and our tendency to avoid conflict and confrontation make payment collection one of the worst nightmares for any manager. The time required for staff to recover outstanding amounts, concerns about properly handling this task, and fear that it may affect relationships can all give the impression that the effort is not worth it.

That said, the purpose of this article is to address various methods a franchisor should adopt to ensure sound and profitable management.

Interacting with franchisees and building strong relationships is the very nature of any franchise. However, having to constantly remind franchisees to pay what they owe requires time and effort that distract both franchisors and franchisees from running their operations smoothly.

Many software tools exist to handle accounting, management, or other tasks. However, failing to take into account the human aspect and analyze the franchisee’s point of view can lead to a precarious situation that will have to be confronted.

Before addressing the subject itself, the franchisor must step back and ensure they have prepared for the main issues they will inevitably face with their franchisees. To prepare, a franchisor should: 

a)Conduct a thorough analysis of the financial capacity of the potential franchisee before granting the franchise;

b)Require financial guarantees or implement a system of preauthorized payments;

c)Ensure the necessary software is in place to effectively monitor cash flow;

d)Set up installment payment options;

e)Deploy systems that analyze the franchisee’s financial results.

All these methods must be put in place before granting the very first franchise.

1. Automating preauthorized payment methods: a simple yet powerful tool

One of the most effective strategies for reducing late payments is to use forms authorizing the franchisor to withdraw a minimum amount agreed upon jointly by the franchisee and their accountant when preparing financial forecasts for the first two or three years of operations. This method does not necessarily guarantee full payment, but it at least ensures collection of a minimum amount based on financial projections.

2. Offering flexible payment options to encourage timely payments

The alternative of flexible payment options gives both the franchisor and the franchisee the ability to settle outstanding amounts under adapted payment terms, which can help mitigate issues related to late payments. Companies that provide this type of option allow franchisees to benefit from flexibility that reduces friction in the payment process, while encouraging them to meet their obligations within a timeframe acceptable to both parties.

Moreover, this enables franchisees going through difficult periods to see that the franchisor is taking a positive approach by putting personalized payment plans in place, which can prove to be an effective solution. For the franchisor, a well-structured plan of this kind ensures payment collection in several installments, thereby guaranteeing a steady cash flow without putting excessive pressure on the franchisee.

These payment plans can be adjusted to strike a balance between flexibility and compliance with deadlines. By allowing the franchisee to spread payments over several months, the risk of non-payment is reduced. In addition, this approach ensures that all parties clearly understand the payment schedule, thus minimizing confusion and delays.

3. Encouraging early payments to motivate franchisees

Another strategy to reduce late payments is to encourage franchisees to pay earlier. Many companies have achieved positive results by offering discounts or rebates for early payments in order to promote compliance with due dates. Regardless of the amount—whether 1%, 2%, or 3%—such a reduction may be enough to motivate franchisees to prioritize their royalty payments, contributions to the advertising fund, or other fees.

These incentives not only improve cash flow but also strengthen the relationship of trust. Franchisees will appreciate the opportunity to save on future invoices, whether in the form of cash rebates or discounts on their next product purchases.

In conclusion, regardless of the method chosen, strong relationships with franchisees must be maintained. Clear, open, and transparent communication helps prevent potential friction and preserve the relationship while ensuring compliance with payment terms.

If a franchisee is facing financial difficulties, the franchisor must show openness and empathy and be willing to negotiate solutions acceptable to both parties. Offering more flexible terms or restructuring the payment plan can demonstrate the franchisor’s willingness to support the franchisee’s business while safeguarding the company’s financial sustainability.