Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Franchisees Are Using Revenue Sharing to Recruit Top Managers
Transcript
- Lucas: There's a quiet shift happening in how franchisees are compensating their store-level general managers, and it's not coming from the franchisor playbook. It's coming from operators who are tired of watching their best managers leave for a two-dollar-an-hour raise down the street. Luna: You're talking about revenue-sharing arrangements at the unit level, right? Not equity or traditional profit sharing, but a direct cut of top-line revenue. Lucas: Exactly. And the numbers are pretty striking. I was looking at a case from a five-unit Jimmy John's operator in central Ohio. He started offering his top store manager a 10 percent share of any revenue above a baseline number — essentially giving the manager a direct incentive to grow sales. Before that, his manager turnover was about 14 months. After implementing the revenue share, the average tenure jumped past three years. Luna: Fourteen months is brutal. That's basically constant recruiting and training. How did he decide on the baseline? Lucas: He used the store's average monthly revenue over the prior 12 months, adjusted for seasonality. So the manager wasn't getting a cut of existing business — only the growth. And the arrangement was transparent: every month, he'd show the P&L, calculate the overage, and cut a check. No bonus pool, no subjective performance review. Luna: That clarity matters. One of the biggest frustrations I hear from store managers is that bonuses feel arbitrary. 'You get a bonus if we hit certain targets' — but the targets shift. Lucas: Right. This removes that friction entirely. The manager knows exactly what drives the payout: more sandwiches sold. And because it's revenue-based, not profit-based, the manager doesn't have to worry about food cost or labor cost fluctuations that are often outside their control. They just focus on top-line growth. Luna: But doesn't that create a problem? If the manager gets a cut of revenue, they have no incentive to control costs. They could run up labor or give away free food to boost sales, and the owner eats the margin hit. Lucas: That's the classic critique. And some franchisees do add guardrails — they'll cap the revenue share or tie it to a minimum profitability threshold. But the Ohio operator told me he hasn't seen that problem. His view is that a good manager who's already thinking like an owner won't waste money, because they know it hurts the business long term. And he keeps a monthly review to catch any red flags early. Luna: It's almost like a mini-franchise within the franchise. The manager gets a taste of ownership without having to put up capital or sign a personal guarantee. Lucas: Exactly. And that's why this is spreading beyond fast food. I've seen service-based franchises — think home care, auto repair, even some fitness concepts — start offering unit-level revenue shares to attract experienced managers who might otherwise open their own competing business. It's a retention tool that doesn't require giving away equity in the whole company. Luna: But what about the franchisor? Most franchise agreements restrict how you compensate employees. Does the franchisor care if you're effectively giving a manager a slice of the revenue? Lucas: It depends on the brand. Some franchisors have explicit rules that managers can't have any ownership interest in the unit — that's usually about avoiding a de facto transfer of the franchise rights. But a revenue-sharing bonus isn't ownership. The manager isn't on the franchise agreement, they can't sell the store, they don't get a say in branding or menu changes. Most franchisors I've talked to are neutral or even supportive, as long as it's structured as a compensation plan, not a partnership. Luna: And tax treatment? That's a big one for franchisees. If you structure it wrong, you could end up with payroll tax headaches or the manager being classified differently. Lucas: Absolutely. If it's a bonus tied to revenue, it's typically just ordinary income — W-2 wages, payroll taxes apply, no complications. But if you call it a 'share of profits' and treat the manager like a contractor, you could run into trouble. The Ohio operator keeps it clean: it's a bonus line item on the P&L, paid through payroll, fully taxable. He also works with an accountant who specializes in franchise compensation. Luna: So what's the downside? If it works so well, why isn't every franchisee doing it? Lucas: A couple of reasons. First, it only works for growth-oriented stores. If a location is already at capacity — say, a fast-casual restaurant that can't serve more customers because of kitchen throughput — then revenue sharing doesn't move the needle. The manager can't grow sales, so the incentive is meaningless. Second, it requires trust and transparency. The franchisee has to open their books to the manager every month. Some owners are uncomfortable with that level of visibility. Luna: And if you have a bad month — maybe construction on the street hurts traffic — the manager gets zero, which might demoralize them even more than a straight salary. Lucas: That's real. That's why some operators include a small guaranteed override — like a lower base salary plus the revenue share — so the manager doesn't feel punished for factors outside their control. But that obviously eats into the cost advantage. Luna: Speaking of cost, let's talk about the financials for a minute. If you're a franchisee with a store doing $800,000 a year in revenue, and you give the manager 10 percent of every dollar above that baseline — say the store grows to $880,000 — the manager gets $8,000. That's a nice bonus, but is it enough to really change behavior? Lucas: In the Ohio case, the operator told me his top manager was earning an extra $15,000 to $20,000 a year from the revenue share. That's meaningful for a general manager making maybe $55,000 base. And when you consider the cost of replacing a manager — recruiting, training, lost productivity, which the franchise industry estimates at 30 to 50 percent of annual salary — the math works. Even if you pay out $20,000 in bonuses, you save $20,000 to $30,000 in turnover costs. Luna: Plus you get a store that's growing faster because the manager is actively driving sales. That compounding effect is where the real return comes from. Lucas: Exactly. And the data backs it up. The operator saw same-store sales growth of 8 percent in the first year of the plan, compared to about 2 percent for his other stores with traditional bonuses. He attributes that entirely to the manager's focus on catering orders and local marketing — things a salary-only manager might not prioritize. Luna: There's also the spillover effect — if you have multiple stores, you can create competition. One manager sees another earning a big revenue-share check, and suddenly everyone wants in. Lucas: That's exactly what happened. He now has four of his five stores on revenue-sharing plans. The fifth store is in a location with flat sales potential, so he kept that manager on a straight salary plus a smaller profit-share. But his newer hires specifically ask about the revenue-sharing program during interviews. Luna: It's become a recruiting tool. That's interesting — because in a tight labor market, franchisees are desperate for ways to stand out. Offering a share of revenue is something a minimum-wage competitor can't match. Lucas: Right. And it signals that the franchisee is willing to treat the manager like a partner, not just an employee. That alone can shift the dynamic. The manager starts thinking about the business differently — they'll notice waste, they'll suggest menu tweaks, they'll stay late to close properly because it affects their check. Luna: I wonder if we'll see this become a standard offering in franchise systems, like a formalized 'manager development program' that the franchisor supports. Lucas: Some franchisors are already starting to pay attention. I know a few that have added optional revenue-sharing templates to their operations manuals. They realize that if their franchisees can retain better managers, the whole system benefits — higher royalties, fewer closures, better brand consistency. But they're careful not to mandate it, because every unit is different. Luna: If these conversations have moved your work forward in some small way, we do have a link where you can show support. It's buy me a coffee dot com slash fexingo. No pressure, just a way to keep the show ad-free and focused on the strategies that actually work. Lucas: And we mean that — the show stays free either way. But if today's episode saved you an hour of research or gave you an idea you can try, that's the kind of thing that keeps us going. Luna: Yeah. So back to the revenue-sharing model — what do you see as the biggest pitfall that franchisees should watch out for? Lucas: I'd say the biggest risk is not modeling the scenarios carefully enough. If your store has thin margins — say 10 percent — and you give away 10 percent of revenue growth, you're basically giving away all the incremental profit. You need to know your numbers cold. The Ohio operator's stores have margins around 18 percent, so even after the revenue share, he keeps most of the upside. But for a low-margin concept, a poorly structured share could leave you with less profit than before. Luna: So you really need to calculate the break-even point. How much does the store need to grow before the owner is better off than without the plan? Lucas: Exactly. And you also have to account for the fact that the manager might hit a ceiling. Once the store is running at capacity, revenue stops growing, and the manager's pay flattens. At that point, you might need to reset the baseline or add a new incentive — maybe a profit share on cost savings — to keep them engaged. Luna: It's not a set-it-and-forget-it solution. It requires ongoing management and communication. Lucas: Right. But for franchisees who are willing to put in that effort, the data suggests it works. Higher retention, higher sales, and a manager who thinks like an owner. In a world where finding good management is the number one constraint on growth, that's a pretty powerful tool. Luna: And it's a reminder that sometimes the best innovations don't come from the franchisor — they come from the franchisee who's tired of losing good people. Lucas: Exactly. The best ideas in franchising often start at the unit level. The trick is recognizing them and sharing them — which is what we try to do here.