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Huddle House Drops Franchise Fees

HuddleHouse_CEOGreifeld
Huddle House CEO Phil Greifeld, photo/huddle house

ATLANTA – Huddle House, an Atlanta-based chain that has slowly built a network since 1966 of 400 restaurant franchises, largely in the Southeast and MidWest, announced Wednesday that it would lower its licensing fee from $25,000 to just $5,000. It is also waiving the first five months of franchise royalties.

It's not just Huddle House that is hungry to find franchise buyers: in this environment, small business buyers are having a particularly difficult time finding adequate capital, resulting in fewer viable applicants. Entrepreneurs are complaining that banks are not giving out loans for small business expansion. As a result, Technomic, a leading food research and consulting firm, expects sales in the restaurant industry to decline 1.6 percent this year. And that’s an additional dip from the 3.5 percent drop in 2009.

Despite such bad economic news, Huddle House’s chief development officer, Thomas Flaherty, thinks the restaurant chain could be growing at a nice clip if buyers didn't have to dig so deeply into their pockets. “The exciting thing is that there is still a great deal of growth potential,” he states.

To give the chain a leg up on the competition, Huddle House buyers can now get into owning and running a restaurant on the cheap.

“This program allows existing and new Huddle House franchisees the opportunity to develop with a lower cost of entry. Also, the savings in paying no royalty for the first five months provides fuel for new restaurants to advertise more heavily during the initial stages,” says Huddle House’s chief development officer, Thomas Flaherty, who recently came on board from Papa John’s.

But is the lowering of a franchise cost necessarily a better value for buyers?

Peter Birkeland, franchise and small business consultant, thinks it's a bad sign when a franchisor drops its licensing fee. “Once you decide to discount the price of any product or service, you have commoditized yourself, so that the only characteristic that people look at in deciding to purchase your product or service is price,” says Birkeland.

A franchise (licensing) fee is the initial price that a franchisor charges to be a licensee. Franchisors explain the fee as compensation for finding, negotiating and sometimes training the buyer. Franchise fees are typically not methodically broken down to reflect actual cost structures. So these fees tend to be rounded numbers like $5,000, $25,000, or $40,000.

“Price is not the most significant factor in a market economy. It's value,” declares Birkeland, author of the book Franchising Dreams: The Lure of Entrepreneurship in America. “If something is a fair value then it should never be discounted. Harvard doesn't compete with Stanford by lowering its tuition, but by creating a unique experience, a better education, lower student-faculty ratios, or any  number of qualities that increase the value of a Harvard education.” He also argues that lowering license fees and providing royalty holidays can weaken a franchisor financially, pulling it away from needed restaurant support.

Huddle House CEO Phil Greifeld sees it another way. “Many good investments are made during a down economy,” says Greifeld. “And our incentive program provides a great investment benefit to both existing and new franchisees.”

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Staff reporter for Blue MauMau