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A price war has broken out by franchisors to attract the nowadays rare bird of single-unit mom and pop franchise buyers.
A virtual who's who of established franchisors are discounting up-front franchise fees, such as Dunkin' Donuts, Fazoli's, Domino's, Huddle House, Papa John's and many others, writes Forbes blogger Carol Tice.
At this point, if you’re not offering some kind of discount deal, you’re the exception. But cutting fees can set up a chain for other troubles. By lowering the bar for who can own a franchise unit, a chain might recruit undercapitalized, struggling franchisees who end up having to close their units.
The fee cuts ignore a basic fact: That franchise fee is there for a reason. That money goes toward building the infrastructure that supports the franchisees, and toward building the brand’s future. Less money in the fee kitty translates into fewer support staff, less advanced technology systems, and less money for research and development of new store formats or products. It starves the chain of the investment capital it needs to be competitive. So a lower fee might sound like a deal at first, and help get you in the door. The question is whether your success odds have been lowered by the discount. [via Forbes]
It's a tough balancing act given today's realities. If there are dwindling mom & pop buyers to be had for the modern franchisor, then heads of franchising companies likely feel that rolling back franchise fees and asking for greater royalties later on are better than no money at all. Nonetheless, the strategy undermines the franchisor's ability to support franchisees and possibly its own continuation by not taking sufficient money up front.
In his 2005 book From Ice Cream to the Internet, Using Franchising to Drive the Growth and Profits of Your Company, Professor Scott Shane of Case Western University admonishes only new franchisors to discount their franchise fees. His survey showed that $32,000 was the average for the industry then. "Don't take a large portion of your compensation from up-front fees when your franchise system is new; focus instead on getting this money from royalties," he writes.
In today's environment, if even large established franchisors find it necessary to heavily discount, then new startups are in deep trouble.They are pushed even further to forgo being paid today to fund support in hope of being paid tomorrow.