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The great franchise giveaway

Monday, 13 February 2012 | By Michelle Hammond

The problem franchisors face in recruiting quality franchisees isn’t a new one, but only recently have industry players begun to offer bold incentives, such as the reduction or elimination of fees.

 

In December, pool and spa franchise Swimart made headlines with the announcement that it will waive its $45,000 joining fee for independent operators prepared to rebrand as a Swimart store.

 

Then last month, kitchenware retailer King of Knives said the first three franchisees who sign up before April 30 will receive $20,000 worth of stock, valued at $40,000 at retail.

 

“It’s not an easy climate and there are lots of systems competing for the same customer,” franchise manager Daniel Hochberg says.

 

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“We hope this will differentiate us, and motivate potential franchisees to consider joining us. In difficult times, it will also ease the financial burden on new franchisees.”

 

According to Jason Gehrke, director of the Franchise Advisory Centre, there are three main factors affecting franchisee recruitment, the first of which is relatively low unemployment.

 

“Anyone who wants a job has got one. They may well be thinking that with wages and salaries at record-high levels, why take the risk on any kind of business, franchised or otherwise?” he says.

 

Gehrke identifies the gloomy economic outlook as another factor, claiming would-be franchisees are opting to reduce rather than increase their debt levels, namely by paying off their mortgages.

 

Finally, he says access to finance is becoming increasingly difficult because the banks have tightened their lending criteria as a result of the GFC and the more recent global economic uncertainty.

 

Steve Wright, executive director of the Franchise Council of Australia, says the prospect of state-based franchising laws in both Western Australia and South Australia isn’t helping matters.

 

“Both franchisors and franchisees are telling us they don’t need or want this legislation,” Wright says.

 

“With increased compliance costs, a disincentive to investment in [both states] and duplication of the national regime, this approach is all risk with no benefit.”

 

Gehrke says Australia also has more franchise brands per head of population than any other country, “with the possible exception of New Zealand”.

 

“The number of franchise systems has more than doubled over the last 20 years, but in the last couple of years has receded from its peak of 1,100 systems due to market forces,” he says.

 

“It is likely that as smaller systems struggle to recruit franchisees and achieve critical numbers, there will be more sales and merger activity, with larger and more established franchises.”

 

“This may result in a further reduction in the number of brands in the market.”

 

This is already happening, as seen last month by Tasty Trucks’ acquisition of Lunch Express – a Newcastle-based business that operates a network of 17 lunch vans.

 

Tasty Trucks launched just three months ago in the form of a franchising model dubbed “vanchising”. The company’s 64-van network delivers meals daily through Victoria.

 

Founder Colin Lear says the Tasty Trucks vans will eventually replace the Lunch Express ones, and is confident there will be an additional 20 vans in Victoria and NSW in the next 12 months.

 

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“In addition, we will continue to look at acquisitions in other states of Australia in a bid to realise our goal of becoming a national brand,” Lear says.

 

Gehrke says that there are other funding models that could become popular as franchises are squeezed, including:

  • Vendor financing under various forms such as work or lease-to-own programs.
  • Family funding, ie. Mum and dad providing the finance for their kids to buy a business.
  • Co-funding, whereby those who can’t afford a franchise individually form a partnership.
  • Internal funding where successful franchisees take partial investments in new franchisees.
  • Capital raisings by franchisors to open outlets themselves (rather than waiting for franchisees) via partial sales to private investors, private equity and public listings.

Gehrke says while franchisees may be in a better position to negotiate commercial concessions when joining a franchise, they should not make their decision based solely on an incentive.

 

“No single incentive is likely to be a silver bullet that will magically conjure hoards of potential franchisees from thin air,” he says.

 

“But several incentives combined may be critical to building the confidence of the franchise candidate to approach one system in favour of another.”

 

Rod Young, managing director of DC Strategy, agrees that franchisees appear to have an advantage over franchisors, but says this is generally only the case in newer or smaller franchise systems.

 

“I doubt if you will see a discounted McDonald’s franchise or a cheap franchise fee for a good franchisor like Ben & Jerry’s... Good franchises command and maintain their prices,” he says.

 

“More desperate franchisors are negotiating agreements, discounting initial franchise fees and even reducing royalties.”

 

“Those who do this may eventually find it is to the longer-term disadvantage of the franchisees as it may compromise the viability of the franchisor if the commercial model is corrupted.”

 

Young says the best ways to exploit franchisors’ increasingly desperate recruitment tactics including asking for extended credit terms on stock, and being choosier about your location.

 

“Buy an underperforming franchise in a good system – often less than the cost of a new franchise – [or] offer to buy profitable, company-owned and managed locations, areas or stores,” he says.

 

“[You could also] ask for more training or more opening promotional support, or request that a part of the royalty for the first year be rebated to advertising in the local market.”

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