Discounted Franchise Fees and Concessions: Are they really necessary?

I’m confused. Many signs are pointing towards the economy rebounding, albeit slower than we would like. The franchise finance situation appears to be improving, although also at a slower pace than we prefer. And, the spirit among franchisors appears to be positive and optimistic. Certainly, more so than this time last year. Yet, we continue to read about some franchisors offering discounts and concessions as an enticement, a lure if you will, to attract new franchise candidates. Does this practice really make sense?

Last year there was a discussion within the LinkedIn franchise groups that addressed the issue of discounts and concessions. The original discussion posed the question, “What kind of discounts or concessions are required now to get a franchisee candidate to move forward?” and generated many responses and different views. The following was my response when my view about getting back to basics was perceived to be fine during “normal times” but was challenged as a solution in more difficult times. Sure, last year should be considered a difficult time. But is that really still the case? In that same thread, there was also a subsequent response from another franchise professional that implied there are too many franchisors. I did address that as well last year, but now have begun to ask that same question.

“Although it’s certainly easier to accomplish franchise growth during “normal” times, the basics need to be in place even more so during tough times. That’s not to say we don’t need to think and act outside-the-box to make something happen. It just means we need to be extra prudent and diligent in our actions and not use the economy as an excuse for poor execution of skills.

If franchisors are to offer discounts and concessions in awarding franchises they need to be extremely careful they don’t oversell or create the perception of desperation. By doing so, they’ll either lose the deal or create a situation whereby the franchisee will not have respect for the franchise system and feel if one or two concessions were made initially, why not more moving forward? And then, there’s the perspective of franchisees already in the system that paid full amounts without concessions. What’s in it for them?

Nevertheless, with reports like Franchise Update’s about poor franchise sales performance and practices, I can’t help believe franchise systems wouldn’t be in better shape if their sales basics were perfected. It has to start with the basics before changing direction or considering revisions to the program.

In any business, just like in any sport, when a slump is imminent, it’s the fundamentals that need to be worked on before anything else should be considered or entertained. Once that’s done, then it makes good business sense to consider other options. At the very least, it should be done simultaneously. If not, what’s going to be the excuse when concessions and discounts don’t work?”

I guess my questions now are, “What have franchisors learned from the economic downturn, and what has been done to improve, not only their franchise sales process, but the weak spots within their systems, to offer a greater chance of success to current and future franchisees alike?” Or, is it just perceived to be easier to offer discounts and concessions?

In addressing the statement about there being too many franchisors, I replied, “Saying there are too many franchisors is akin to saying there are too many businesses of the same kind. What happened to free enterprise and entrepreneurship? Maybe, franchising could be better served by more regulation, licensing and policing, to weed out the weaker (for whatever reason) franchisors and make it more difficult to become a franchisor. Unfortunately, I don’t see that happening because the “big boys” of franchising will squash those efforts in a New York minute. I look forward to debating this topic in a different discussion or forum.”

Have my thoughts on this changed in the past year? Yes, they have. But, more from the perspective of regulation, licensing and policing being absolute last resorts. Instead, my focus is now on dedicating more efforts to education, and specifically, quality of education. To paraphrase Ken Walker during one of his many excellent addresses at the IFA Convention, “We need to continue to prove that franchising can effectively govern itself.

In my opinion, franchising can accomplish this, but does need to do more in educating franchisors, especially new, and often impressionable, franchisors. And, there’s the key – impressionable! Yes, there are many educational opportunities available for franchisors… more than ever before. But, it doesn’t necessarily mean that more is better as quality over quantity is more effective in the long run. Now, THAT, is something I look forward to debating!

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One thought on “Discounted Franchise Fees and Concessions: Are they really necessary?

  1. You have created an excellent presentation based on good business judgement and concerns regarding discounts. I can’t argue you points because I generally agree with them. I do, however, feel that there are times when franchisors need to recognize triming, adjusting or deferring certain fees for a specific period of time. Franchising continues to grow because franchising is still a great way to be introduced to a business model that has a succesful history versus new start ups that simply won’t have the support from operations, training, marketing and accounting support franchisors have put together during their life time. However, lenders are not on the same train as the franchisor and candidate. Lenders require more equity postions by the borrowers which translates to less capital available for the hard costs of development. Franchisors may elect to advance the development phase by granting certain abaitments, deferrals or straight reductions in order for the lender to express interest in the project. That being said, the franchisor must maintain vigulance on their growth plans so their cost to support each opening is managed from a minimul amount of existing resources. There has to be a balance between the income and expenses.
    I am in favor of thinking out of the box, as you are, and know that creative solutions will make a positive impact on franchise relationship building and growth.

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