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Creative Ways for Franchisors to Attract New Franchisees

By Ed Teixeira

For the past several years, the recession and the resulting reduction in the traditional sources of new franchisee investment capital has slowed the growth of new franchisees. The real estate market has shrunk home equity values and small and medium banks have significantly tightened business loans. Here are some creative ways franchisors can stimulate new franchise growth.

There is no disagreement on the fact that the great recession has hurt the growth of new franchise sales except for select franchise concepts. The reasons for this situation run the gamut from tight credit markets to less availability of home equity funds. As a result a number of franchisors are finding it more difficult to grow their system by adding new franchisees. When situations like this arise it’s important for franchisors to get their creative juices flowing.

There are a number of ways to stimulate new franchise growth without compromising your standards of qualified franchise prospects. However, franchisors need to exercise due diligence when confirming the qualifications, potential and business skills of franchise candidates. Consult with your franchise attorney regarding changes to the Franchise Disclosure Document. For example, financing may be limited to individuals that meet particular qualifications such as related franchise industry experience.

Here are my suggestions:

Finance the initial franchise fee: This is the easiest change to implement and one that can be managed. There are a number of franchisors that will gladly pay a franchise broker $12-$15,000 to find a qualified candidate but wouldn’t consider financing a portion of the franchise fee. More and more franchisors are reducing or financing a portion of the initial franchise fee. The Vetfran program which is directed to U.S. military veterans has been quite successful.
Delay the payment of franchise royalty fees: It may not represent a large amount of money, but accruing the payment of a franchisees royalty and ad fund fees for 6 months will be a source of working capital. The deferred royalties can be amortized over a short period of time.
Finance the fees for existing franchisee expansion: There may be existing franchisees that seek to operate another location but don’t have all of the necessary capital. Franchisors need to be cautious and not encourage franchisee expansion except for those franchisees that have a record of accomplishments and have expressed a desire to grow.
Joint ownership of the franchise: There is nothing to prevent a franchisor from owning a majority equity position in a franchise. These agreements have to be properly constructed and have been successfully used by a number of franchisors. Once the franchisee achieves particular performance goals the franchisee acquires the franchisor equity for a reasonable amount.

During these difficult economic times franchisors need to be more creative when it comes to selling new franchises. There are various ways that franchisors can stimulate and support new franchise growth. The important point is to get the creative juices flowing to arrive at ways to bring more franchisees on board.