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Franchisors Need to Take More Risks

By Ed Teixeira

It’s been a challenging few years for the franchise industry, especially when it comes to growing a franchise network. However, it’s during times like this that success often comes to those willing to take risks. Franchisors should consider taking steps that may be out of the mainstream, but can help add new franchisees to the network.

The prolonged recession coupled with depleted personal retirement accounts and diminished home values have continued to retard the growth of new franchises. Adding the weak level of consumer confidence to the mix and the climate for selling franchises is as difficult as it’s ever been. However, on the plus side there are still countless numbers of people looking to own their own businesses both independent and franchised. Despite this enthusiasm there are challenges that may stand in the way of these entrepreneurs.

The obstacles and concerns that many of these individuals face:

Tight credit
When will the recession end?
High unemployment, especially in certain markets
A weak housing market that is not recovering
Current and impending Government regulations that can impact small businesses. These may be real or perceived.

These factors not only create anxiety but people interested in a franchise are more critical in their evaluation and decision making. If they are not, I would question their qualifications. It also means that many franchise prospects feelj a higher level of risk.

This is the franchise sales environment that currently exists and franchisors willing to take some risks may be more successful in selling new franchises.

Recent articles about sources of credit have focused on third party programs that include accounts receivable factoring and credit card funding. However, these solutions are suited for franchisees that have receivables or credit card sales and are already in business. Franchisors need to consider prospective franchisees in view of the risks previously mentioned and employ ways to share that risk. The franchisor practice of not providing direct financing is based upon the premise that a franchisee without the risk of investing in the franchise may not be fully committed to the franchise. However, this position is as fallible as that of a franchisor that obtains equity financing not being fully committed.

The important point is: Many franchisees see themselves facing added risks in today’s economic environment but still want to purchase a franchise. Franchisors can share the risk and in the process attract more new franchisees.

Suggestions for Franchisor Risk Sharing:

Provide start up financing for the initial franchise fee and other services. Use a promissory note to secure the financing and provide for a repayment plan. The franchisee should still invest capital; however, this method enables them to invest it directly in the start-up and initial operation of the franchise.
Open new locations under a joint venture program whereby the franchisee can own up to 49% equity with a program to buy out the franchisor equity. Have performance triggers that will enable the franchisee to acquire more equity or full ownership.
Open select corporate owned locations with the plan to sell them as a franchise, with some portion of the purchase price financed. This method can also be used to enter new markets, whereby the franchisor gains a full and complete understanding of what it takes to succeed in that particular market.
Provide aggressive sales programs for new franchisees that enable them to earn royalty rebates. This can reward franchisees for reaching goals that bring their franchise to a higher sales level that much faster.
Consider underwriting a portion of third party financing for a new franchisee. The amount guaranteed could be a small percent of the obligation, which would give comfort to the lender and share a small portion of risk with the franchisee.
Engage in a conversion franchise program, if the franchise concept is capable of this approach. Some franchises lend themselves to conversion franchising more readily than others.

Since franchisees feel a higher level of risk during these tough economic times franchisors can help alleviate this sense of risk by utilizing some creativity. The results can lead to an increase in new franchise sales for those franchisors willing to take that extra step.