Franchisers sweeten pot

The Wall Street Journal – Franchise companies, facing what many say is the toughest economic environment they’ve seen, are offering two-for-one deals, reduced fees and financing help to woo new buyers. They are also paying existing franchisees to help spread the word.

The economy has made many would-be franchisees wary of taking big financial risks, while others simply can’t get the necessary loans. Meanwhile, competition among franchisers is growing, giving investors a lot more choices. There are now about 3,000 different franchise concepts, according to the International Franchise Association.

In a survey released last week of some 150 franchise companies, respondents said their franchise sales were about 72 percent below their 2008 goals, with inquiries from prospective franchisees down about 48 percent, according to Franchise Update Media Group, San Jose, Calif.

But even as ”closing deals is becoming more of a challenge,” says Harold Kestenbaum, a franchise attorney in Uniondale, N.Y., franchise companies have to be careful not to alienate existing franchisees when they offer discounts and other incentives to new buyers. ”How does it look for the guys who pay the higher price when they see the price is getting lowered?” he asks. Making the situation more sensitive, existing franchisees, especially in the retail and home-service sectors, are being hit by cutbacks in consumer spending.

Doug Disney, president and founder of tile franchiser Tile Outlet Always In Stock Inc., argues that ”in a slower economy, you need to be creative with initiatives and ways to increase awareness.” As part of that effort, the Rancho Cordova, Calif., company hopes to make it easier for franchisees to qualify for loans. Tile Outlet paid a $2,500 fee and submitted its franchise agreement for review so that it could be added to the Small Business Administration’s preapproved vendor list.

Potential franchisees still have to qualify for loans from banks and other lenders based on their credit, assets and other financial metrics, but joining a franchise that has already been reviewed by the SBA gives them a boost. Since Tile Outlet joined the SBA list, three potential franchisees have begun the loan-application process, the company says.

Last month, Tile Outlet also began offering a $2,500 bonus to existing owners who refer potential buyers. As a result, Mr. Disney says, in the past three weeks the franchiser has received two referrals that have begun the application process. Franchisees are ”our best advocates because they already have successful stores,” he says.

Earlier this month, Seattle-based Emerald City Smoothie launched a ”Buy One, Get One Free” initiative. Franchisees can purchase an 800,000-square-foot Emerald City Smoothie store for $20,000 and get a free kiosk in a gym, airport or small retail space. For franchisees, ”it’s a lot less money in terms of development and build-out,” says Rich Folk, the company’s chief executive.

With many banks tightening their lending requirements, Gold’s Gym Franchising LLC of Irving, Texas, is giving prospective franchisees more time to get financing by expanding its development cycle to three years from two. ”If we’re happy with the guy as a franchisee and the only thing between him and the Gold’s Gym is that he needs more time to line up the financing, then I think it’s in my interest to do that,” says Keith Albright, senior vice president of franchising.

Another part of Gold’s recruitment effort is enticing independent gyms to switch to the Gold’s brand. ”The softening economy makes it more difficult to go out and build brand-new beautiful Gold’s Gyms from the ground up,” Mr. Albright says. ”So the thought becomes, ‘What if we tried to go recruit the competition and get them to change flags.”’ Since last year, about six conversions have been added, bringing the total number of U.S. Gold’s Gym franchises to 475.

In August, Chip Ikerd, the 29-year-old owner of a gym in Somerset, Ky., signed an agreement to convert his facility to a Gold’s. He is spending about $75,000 for some physical improvements, sign changes and a $25,000 franchise fee and will reopen the gym next month.

Mr. Ikerd is counting on the Gold’s brand to boost membership. He now has about 850 members, down from a high of 1,500 in 2004. He hopes to increase that to 2,000 in the next two years, and he is expecting to gain improved customer service, brand loyalty and quality-control systems, as well as the ability to tap into the franchiser’s pool of qualified health-club workers.

Interiors by Decorating Den of Easton, Md., says it has seen a 33 percent decline so far this year in the number of leads it has received compared with last year, including inquiries from interested franchisees and requests for information. In response, among other incentives, it is offering to finance up to 50 percent of the franchise fee (or up to $15,000) for qualified individuals with a minimum of $55,000 in liquid capital. People may have the skills but not the capital to launch a franchise, says Kevin Atkinson, Decorating Den’s vice president of program development.

The company has also set up an entry-level decorator program. Potential owners can join Decorating Den as commissioned decorators working for existing franchise owners. They get to see how the business works and attend special training sessions featuring sales, marketing and decorating techniques – and, the franchiser hopes, eventually open up a franchise of their own.

Decorating Den hopes to sign up 180 new franchisees in the next year. ”By being creative,” Mr. Atkinson says, ”these measures will not only help us weather the current economic storm but will actually make us stronger as the pendulum swings up once again.”