Franchisors will sometimes send reverse royalties to franchisees who:
Multiple Choice
feel their sales have been hurt by the franchisor’s Internet sales.
are using e-commerce to expand their sales territory.
desire to streamline their communication with employees, customers, and vendors.
have not yet created their own web site.
The correct answer and explanation is:
Correct Answer: Feel their sales have been hurt by the franchisor’s Internet sales.
Explanation:
Reverse royalties are payments made by franchisors to franchisees, typically in situations where the franchisor’s direct business activities—such as online sales—negatively impact the franchisee’s revenue.
In a traditional franchise system, franchisees pay royalties to the franchisor for the right to use the brand, products, and operational support. However, as e-commerce has grown, some franchisors have established their own direct-to-consumer online sales channels. This can create conflicts when online sales compete with physical franchise locations, leading to reduced foot traffic and revenue for the franchisees.
To mitigate this issue and maintain strong franchisee relationships, some franchisors implement a reverse royalty system. This means that when a customer purchases a product or service through the franchisor’s website—potentially instead of visiting a local franchise store—the franchisor compensates the affected franchisee by sharing a portion of the online revenue. The goal of this approach is to balance the interests of both parties and ensure franchisees continue to benefit from being part of the brand.
For example, if a franchisee operates a local store selling specialty coffee, and the franchisor starts offering online sales of the same coffee, customers might choose the convenience of home delivery instead of visiting the store. In such cases, the franchisor may offer a reverse royalty based on the number of sales made in that franchisee’s geographic area.
By providing reverse royalties, franchisors acknowledge the impact of digital transformation while maintaining a cooperative relationship with their franchisees. This approach helps franchisees stay financially viable and reduces potential disputes within the franchise system.