Beware The Franchising “Opportunites” Being Offered Today!

Previously I blogged about the  latest Quiznos attempt to lure prospective franchisees. They are offering financing deals that would make it very easy to own a small business that is backed by the marketing, procedures and processes of a large international franchise organization.

This franchisor is not the only one offering supposedly good deals to existing or new franchisees to open new or take over existing stores. This is becoming more common as the financial crisis continues to drag on and more and more stores from all  franchise concepts become unviable and franchisees walk away from their businesses or file bankruptcy and let the lawyers work out the details.

For a franchisor that holds the head lease to these businesses this becomes a long term problem. With years left on the lease and little hope of sub-leasing the building as well as de-fit costs or the cost of running an unprofitable business corporately, this can be a long term financial drain for the franchisor. Now multiply this by the tens or in some cases hundreds of failed units within some of the larger franchise concepts and you can see why these deals are becoming more prevalent.

Call it a partnership, management agreement or whatever, it still comes down to basics. The franchisor has a store or stores that are not viable for a set of reasons; wrong location, changing demographics, overcapitalization or even an over eager bank that lent too much. The reason does not matter, the ongoing problem does.

It is far more cost effective for a franchisor to offer financial aid to a franchisee when faced with an ever growing list of unprofitable stores than to try to operate it themselves or hope they can sublease the building. The list of aid being given is as long as the creativity of the financial people dealing with the problem.

Adding to the list in last weeks post as regards “creative financing” adding to that we start with:

  • Capped rent, where a franchisor sets out a percentage of the sales as rent and pays the rest themselves. This is usually enough to ensure break even or better for the franchisee if their controls meet industry standards.

  • Upgrade costs. Where a franchisor pays for a refurb or refresh of a site that will bring added custom and better controls.

  • Local store marketing paid for by the franchisor for a certain length of time.

  • Free training.

Well you get the idea. These or any mix of these can and are being used. Have you noticed one missing item in this list and the list from the previous blog. Franchise fees. I have yet to find any franchisor willing to discount or waive (even for a short time) their franchise fees. That sets a precedent that once started cannot be stopped and no franchisor wants it known that they are willing to discount their franchise fees. Now I may be wrong and if so please let me know who has done this and I will be happy to tell the world.

So what’s the problem?

Most of the stores that are going cheap, or the franchisor is willing to give financial assistance are underperforming stores and as such will take a lot of effort (or a miracle in the case of a majority) to ever get them to a break even point without financial assistance.

Now remember that the majority of these financial packages only run for the life of the lease or for a set period, so sooner or later the aid will stop and you will be back in the same position as the previous owner. Remember, a lot of these stores have had multiple owners none of whom have succeeded so let’s hope you are some sort of operations genius and can perform miracles if you decide to jump in! Also some of these packages will tie you to a franchise for a long period of time or until you go broke or perform that miracle. When the lease does run out will the franchisor still want to provide ongoing assistance to an unprofitable store and extend the lease…or just close the store. I guess you can work that one out yourself.

So if you are considering one of these deals from a franchisor be well aware what you are getting into and please seek sound financial and legal advice from industry professionals prior to signing anything. They need you as much as you need them.