Franchisors Sweeten the Deal to Woo Franchisees

Raymond Flandez writes in the Wall Street Journal that 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 franchisors is growing, giving investors a lot more choices.

In a survey released last week of some 150 franchise companies, respondents said their franchise sales were about 72% below their 2008 goals, with inquiries from prospective franchisees down about 48%, 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.

Earlier this month, Seattle-based Emerald City Smoothie launched a "Buy One, Get One Free" initiative. Franchisees can purchase an 800 to 900-square-foot Emerald City Smoothie store for between $165,000 and $290,000 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.

Interiors by Decorating Den of Easton, Md., says it has seen a 33% 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% 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."

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