Contributed by Gerald A. Cook
We are all pretty tired about hearing about “This Economy.” But, no doubt it is tough right now. That said, it is also an opportunity for creativity and new ideas. Sitting back with the same franchisor offerings that worked in better times and getting dwindling sales may no longer be viable for now in “This Economy.” Someone once said something to the effect that doing the same thing over and over and expecting the same results is a definition of insanity. Not to accuse anyone of insanity by providing tried and true offerings from past times, but there is no doubt that the times, they are a changin’
One place where the economy is especially tough right now — but where creative opportunities exist — is in financing. Financing for franchisors is still there. Banks are more restrictive in their loan approvals now, but there is the usual assembly of equity investors, venture capitalists and the like that are still interested. But what about the prospective franchisee who is qualified but needs a loan for part of the required initial investment?
The SBA has always been available for franchisee financing, but the SBA was slow, full of red-tape and ponderous even in the best of times. At least the SBA usually came though with the proceeds eventually. I once had the founder of a small-initial- investment pizza concept that said, if anyone could get his franchisees a steady source of financing for around $50,000, he would kiss their [another term for a donkey] in public. Wonder what he would say today in “This Economy.” Small business lending is tougher than ever right now, SBA or no SBA.
Franchisors can take this situation into their own hands by financing some of that initial investment itself or at least financing the initial fee over time. I know of one company that is trying this and will include the first 2 years of royalties in the monthly payments. (To make this workable with royalties, a fixed royalty fee is probably necessary.) The franchisee still needs to make a down payment, of course.
To be sure, there are a host of collateral considerations involved. Credit checks? (Certainly, but that information the franchisor probably already have as part of the qualification process) Charging interest? Requiring a signed Promissory Note? What are the consequences of failing to pay an installment? Should it be limited time offer? (Probably a good idea) What is the franchisor’s break-even point considering its costs incurred in initial training and other kinds of pre-opening support? The answer to that question probably dictates how long out the financing should be extended.
Also, instituting a program like this will require revising the Franchise Disclosure Document (FDD) — most notably Item 10 among others — and the forms of agreements.
That said, self-financing the franchisee may be a small risk and cost to bear if the program jolts franchise sales in “This Economy.” It may be sane — at least to consider it.