Resourceful Franchisers Give Relief to Franchisees

A growing number of franchisors are providing financial help through becoming bankers themselves and providing offbeat solution to credit. Beside the Wall Street Journal article above, Nation's Restaurant News ($$) provides more examples on how franchisors are creatively dealing with the credit crunch.

1. Picking up parts of the franchisee's tab: "Cold Stone Creamery, meanwhile, has redefined its growth plans, turning to co-branding efforts with Durango, Colo.-based Rocky Mountain Chocolate Factory Inc., a specialty gourmet-chocolate brand, to increase revenue. Cold Stone plans to pick up the tab to rehab test units—a check typically reserved for franchisees."
2. Provide small loans to franchisees, help lend: "Domino’s Pizza Inc. became the first major franchisor to say it would make small loans to strong franchisees that want to buy more units. Papa John’s International Inc. recently followed suit, and even financed the acquisition of corporate locations by a franchisee."
3. Set up in-house lending company, become a banker: "At New York-based Trufoods, plans call for Andy Unanue, the company’s chief executive and the grandson of Goya Foods’ founder, to commit a few million dollars from his personal fortune to a separate financing company that will provide loans to franchisees."

Experts say that franchisors using such aggressive growth strategies against the backdrop of a declining market and economy is problematic.

Acting as a banker, however, poses two big challenges for franchisors. First, they are adding locations despite widespread consumer cutbacks on spending, rising unemployment and trillions of dollars erased from diners’ financial portfolios. Most chains have decided to pull back on growth during these times. Second, they are making a dramatic break with their business model. For publicly owned restaurant companies, that could mean having to consolidate franchisees’ results into corporate results, or guarantee loans, depending on interpretations of financial accounting regulations, such as the so-called Fin 46.

“One of the major benefits of franchising is not funding the growth, and this sort of defeats that purpose,” said Robert Bielinski, managing director in the commercial and industrial unit at CIT Group.

What isn't mentioned is something that I'm sure many CEOs are thinking. Economic downturns are a great time to expand brand and outmaneuver competition. Those with cash and lending capability rule when cash and credit are hard to find. But some experts query, "why expand through franchising if you're the one with the cash?"

Read the full details and examples of this story, Franchisors dig deep to fund own growth by reporter Catherine Curan at Nation's Restaurant News ($$ subscription needed). It's a good read.

I can see how the weak may fall by the wayside. There's thousands of franchisors. There doesn't seem to be a huge number of bankruptcy filings. Metromedia, Bennigan's, NexCen, and Mrs. Field's comes to mind.