Creative Ways for Franchisors to Attract New Franchisees
by Ed Teixeira
For the past several years, the recession and the resulting reduction in the
traditional sources of new franchisee investment capital has slowed the growth
of new franchisees. The real estate market has shrunk home equity values and
small and medium banks have significantly tightened business loans. Here are
some creative ways franchisors can stimulate new franchise growth.
There is no disagreement on the fact that the great recession has hurt the
growth of new franchise sales except for select franchise concepts. The reasons
for this situation run the gamut from tight credit markets to less availability
of home equity funds. As a result a number of franchisors are finding it more
difficult to grow their system by adding new franchisees. When situations like
this arise itís important for franchisors to get their creative juices flowing.
There are a number of ways to stimulate new franchise growth without
compromising your standards of qualified franchise prospects. However,
franchisors need to exercise due diligence when confirming the qualifications,
potential and business skills of franchise candidates. Consult with your
franchise attorney regarding changes to the Franchise Disclosure Document. For
example, financing may be limited to individuals that meet particular
qualifications such as related franchise industry experience.
Here are my suggestions:
- Finance the initial franchise fee: This is
the easiest change to implement and one that can be managed.
There are a number of franchisors that will gladly pay a
franchise broker $12-$15,000 to find a qualified candidate but
wouldnít consider financing a portion of the franchise fee. More
and more franchisors are reducing or financing a portion of the
initial franchise fee. The Vetfran program which is directed to
U.S. military veterans has been quite successful.
- Delay the payment of franchise royalty fees:
It may not represent a large amount of money, but
accruing the payment of a franchisees royalty and ad fund fees
for 6 months will be a source of working capital. The deferred
royalties can be amortized over a short period of time.
- Finance the fees for existing franchisee expansion:
There may be existing franchisees that seek to operate
another location but donít have all of the necessary capital.
Franchisors need to be cautious and not encourage franchisee
expansion except for those franchisees that have a record of
accomplishments and have expressed a desire to grow.
- Joint ownership of the franchise: There is
nothing to prevent a franchisor from owning a majority equity
position in a franchise. These agreements have to be properly
constructed and have been successfully used by a number of
franchisors. Once the franchisee achieves particular performance
goals the franchisee acquires the franchisor equity for a
During these difficult economic times franchisors need to be more creative when
it comes to selling new franchises. There are various ways that franchisors can
stimulate and support new franchise growth. The important point is to get the
creative juices flowing to arrive at ways to bring more franchisees on board.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at