I was looking through the March issue of Business 2.0 (subscription) and found a short article about Curves franchises and Gary Heavin, founder and CEO. (Two questions: (1) Why is it that the founder and CEO of a for-women-only fitness chain is a man? (2) Does any CEO have a more appropriate name for his company than "heavin" for an exercise chain?) One of the perpetual problems faced by franchisees is that they almost always are required to agree to pay the franchisor a percentage of revenues as a royalty. Since increasing revenues do not always result in increased profits, this royalty system creates a conflict between the franchisor and the franchisee. Heavin thought he had a better idea:
When I sold my first franchise in 1995, I learned that fast-food franchisees paid 6 percent of revenues each month, but that didn't make sense to me: Why should franchisees that make the most money have to pay me more? Instead, I charged $20,000 to open a club and a flat monthly fee of $395. Most of my franchisees were profitable in 90 days and were shouting from the rooftops about their quick success.
As his franchise has become more popular, he has raised the initial franchise fee to $30,000, and franchisees now pay 5 percent of revenues, but that payment is capped at $795. At some point, new store openings will slow and Heavin may find himself wanting a bigger piece of the pie, but this is a brilliant strategy for encouraging early success.
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