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September 30th, 2008Franchisers Sweeten Pot to Woo Buyers

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by Raymund Flandez

Franchise companies, facing what many say is the toughest economic environment they’ve seen, are offering two-for-one deals, reduced fees and financing help to woo new buyers. They are also paying existing franchisees to help spread the word.

The economy has made many would-be franchisees wary of taking big financial risks, while others simply can’t get the necessary loans. Meanwhile, competition among franchisers is growing, giving investors a lot more choices. There are now about 3,000 different franchise concepts, according to the International Franchise Association.

In a survey released last week of some 150 franchise companies, respondents said their franchise sales were about 72% below their 2008 goals, with inquiries from prospective franchisees down about 48%, according to Franchise Update Media Group, San Jose, Calif.

But even as “closing deals is becoming more of a challenge,” says Harold Kestenbaum, a franchise attorney in Uniondale, N.Y., franchise companies have to be careful not to alienate existing franchisees when they offer discounts and other incentives to new buyers. “How does it look for the guys who pay the higher price when they see the price is getting lowered?” he asks. Making the situation more sensitive, existing franchisees, especially in the retail and home-service sectors, are being hit by cutbacks in consumer spending.

Doug Disney, president and founder of tile franchiser Tile Outlet Always In Stock Inc., argues that “in a slower economy, you need to be creative with initiatives and ways to increase awareness.” As part of that effort, the Rancho Cordova, Calif., company hopes to make it easier for franchisees to qualify for loans. Tile Outlet paid a $2,500 fee and submitted its franchise agreement for review so that it could be added to the Small Business Administration’s preapproved vendor list. Potential franchisees still have to qualify for loans from banks and other lenders based on their credit, assets and other financial metrics, but joining a franchise that has already been reviewed by the SBA gives them a boost. Since Tile Outlet joined the SBA list, three potential franchisees have begun the loan-application process, the company says.

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