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!

Bookmark and Share

Discounted Franchise Fees: Is it a Good Idea?

The following article was written by franchisEssentials Guest Author, Joe Caruso. Joe is a respected franchise veteran with 19 years of extensive franchise management and development experience, spending the better part of his career in C-level positions, most recently as Chief Development Officer at Kidde Academy. He is quite active in franchise circles and frequently participates in LinkedIn franchise group discussions and at many franchise-related events from Washington D.C. to Philadelphia. Joe routinely shares his perspective and insight that has proven beneficial to several franchisEssentials startup and emerging franchise clients. We look forward to his continued participation and contributions.

Franchise Fee Giveaways!

Of course you’ve heard about the recent franchise fee giveaways that some franchisors have publicly announced. Is it a good idea? Does it diminish the brand to prospective franchisees? What does it mean to existing franchisees that invested at full price?

Certainly not charging a franchise fee might seem like an attractive offer to prospective franchisees. And franchisors that usually take this approach argue – “we make our money from royalties not franchise fees”. While that belief might rationalize the decision to forgo upfront fees it doesn’t sufficiently address the realities of franchise recruitment and the relative expenses. A franchisor might make “its money” from royalties, but it pays for selling costs, lead generation marketing, legal compliance and development sales/support personnel typically from upfront franchise fees.

Logic of forgoing upfront fees escapes me. It seems to me if your cost per sale is for example $15K, your franchise fee is $30K and you want to sell more franchises you could instead of giving away your upfront franchise fee you might invest more money in your franchise recruitment marketing budget?

What are your thoughts?

Bookmark and Share