Franchising

Lately it seems many well known franchisers are offering financing deals to lure new franchisees into buying into what are likely unprofitable stores. The enticements are many including the opportunity to own a small business that is backed by the marketing, procedures and processes of a large international franchise organization. On the surface and to the uninitiated, this looks like a good opportunity. A franchise opportunity that looks too good to be true, likely is.

The parent companies are 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 are failing and franchisees walk away from their businesses. The real question that needs to be answered before considering a "deal" like this is whether or not the failed store would have ever been viable. Was the location a poor choice from day 1?

For franchisers who hold a head lease to these businesses this is becoming a bigger and bigger long term problem. With years left on a lease and little hope of sub-leasing the building as well as de-fit costs, this becomes a long term financial drain for the franchiser. 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 common.

They will sell them as partnerships, management agreements or whatever, it still comes down to basics. The franchiser has a store or stores that are not viable for a set of reasons; wrong location, changing demographics, over capitalization or even an over eager bank that lent too much. The reason does not matter, the ongoing problem does.

If you look through the eyes of the franchiser it is easy to understand. Have a slew of shuttered stores with monthly rent due and a black eye on the reputation of the company (closed business never look good!) or entice a new buyer to take over the business. To the newbie potential franchisee these can look like manna from heaven when in fact you are being lured into a business that will never be viable. There will, of course, be exceptions to this and there is a slight chance that the business closed due to mismanagement and with the right mix could be profitable.

Some of the "creative financing" being offered is:

• Quiznos, for example, is offering an "Operating Partner program" that has an entry cost of $5000
• You get full ownership over time.
• You use the profits of the business to pay for the store. 80%
• You are paid from the profits of the store. 20%
• You are paid a salary as well
• You receive full corporate benefits, health insurance etc.
• Quiznos covers losses for 12 months.
• They set up the LLC and hold the head lease.
• They set up all utility contracts.
• They set up and do P&L's for you.

Additional offers being slung about from various franchisers include:

• Capped rent; this is where a franchiser 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 franchiser pays for a refurb or refresh of a site that will bring added custom and better controls.
• Local store marketing paid for by the franchiser for a certain length of time.
• Free training.

These or any mix of the above can and are being used. There is one critical item missing from the list - franchise fees. I have yet to find any franchiser willing to discount or waive (even for a short time) their franchise fees. That would set a precedent that once started cannot be stopped and no franchiser wants it known that they are willing to discount their franchise fees!

So what's the problem?

Most of the stores that are going cheap, or being offered along with financial assistance are under performing stores and as such will take a lot of effort (or a miracle) to bring them back to a point of financial viability.

It is also important to remember that the majority of these financial packages only run for the life of the lease or for a set period, which means that the aid will stop at some point and you will be back in the same position as the previous owner. Also of note, a lot of these stores have had multiple owners none of whom have succeeded so unless the new franchisee has a dynamic skill set and or magical powers it will remain as unprofitable as in the past. When the lease does run out it is unlikely the franchiser will continue to provide ongoing assistance to an unprofitable store. You then will be looking at a lot of hard work and money down the drain.

In closing, if you are considering one of these "deals" or franchise opportunities from a franchiser be well aware of 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.