Economy effects opening of franchise operations – Hand & Stone
Franchisors seek ways to weather the economy
Co-signing loan papers, buying out operating contracts and modifying licensing fees are among the aggressive steps some franchisors are taking to help their franchisees weather the chilly economy.
Just like small, independent business owners, many franchisees have struggled amid a lingering credit crunch and weak consumer spending.
Their survival is important.
Nationally, franchises accounted for 11 million jobs, or 8.1 percent of the private workforce, and produced $880.9 billion in goods and services in 2005, according to the most recent data available from the Washington, D.C.-based International Franchise Association.
In 2005 in Arizona, franchised businesses employed 262,812 people and produced $21.4 million worth of goods and services.
Franchisors, who license the right to operate businesses in their names, have a vested interest in continuing to attract new franchise buyers and help their existing store operators survive.
Fewer franchises mean less licensing- and royalty-fee revenue, which franchisors depend on to survive.
A rash of store closures also can mar a franchise’s brand.
“I think we’re going to see a fallout in our industry just like we’re going to see a fallout in other industries,” said Jeff Johnson, founder and chief executive officer of the Franchise Research Institute.
The institute, based in Lincoln, Neb., performs surveys for franchisors that gauge their franchisees’ satisfaction.
The strategies that franchisors are employing now are not unheard of even when the economy is good, Johnson said.
But some of the more aggressive steps, such as buying back stores from franchisees who want out of their contracts and temporarily foregoing certain fees, are rare.
Restaurant and other food-service franchisees have been among the hardest hit by the economic downturn.
Health-care and certain technology-related franchises are still seeing strong demand, though.
Local and national franchisors say they’re still seeing demand from prospective buyers who want to open new franchises. The biggest problem is securing credit.
After an 18-year career at Honeywell, Tracie Correll decided she wanted to be an entrepreneur.
Correll started contemplating her next move in 2007. Ultimately, she decided franchising was the route she would take to become a business owner.
In March, Correll quit her information-technology management job at the high-tech manufacturer, leaving behind an $80,000 annual salary.
Correll expects to open her first Hand and Stone Massage Spa franchise in Goodyear this month.
Her opening was delayed twice, most recently because of financing. Correll had put off her opening the first time, early last fall, because she had decided to switch locations.
Then, when a contractor’s bid for tenant improvements came in higher than she anticipated, Correll had to find additional capital.
She had already obtained a loan for about $260,000 through a U.S. Small Business Administration guaranteed-loan program. She needed an additional $100,000 from her lender.
“Basically, I had to start all over again in September,” said Correll, 46.
She estimates the cost to open her 2,400-square-foot studio, including construction, franchise fees, equipment costs and other expenses, will be about $425,000.
“It’s a big, risky step out on my own,” Correll said. “I’d be lying if I said I didn’t have second thoughts.”
Help with financing
Delays due to a lack of financing have become more common, franchise executives said.
“We’re seeing people that qualify under our terms for a franchise . . . but they can’t get funded,” said Ron Lynch, president of the Tempe-based Tilted Kilt Pub and Eatery franchise.
The franchise has 14 locations nationally, four of which are in the Phoenix area.
To qualify under Tilted Kilt’s requirements, prospective franchisees need to have $400,000 in liquid cash and $1 million in net worth outside of their home.
Financing issues have delayed some store openings by two or three months in some cases, Lynch said.
Some franchisors have stepped in to help applicants obtain financing by being a co-guarantor for loans and lines of credit.
“We have literally done a handful of those, but it is not a big number at all,” said Lee Knowlton, chief operating officer for Scottsdale-based franchising company Kahala Corp. “We have over 3,500 stores across 12 brands. It’s not a company policy right now.”
Kahala’s chains include Cold Stone Creamery, Blimpie, Samurai Sam’s Teriyaki Grill, TacoTime and other quick-service restaurants.
Knowlton said none of Kahala’s individual brands have experienced a major sales drop. But he expected new franchise openings across the company would be down for 2008.
“We’re hearing from franchisees that traffic is down or that customers are looking to trade down,” Knowlton said. “In general, in our categories we’ve done OK. I’m not going to say we’re tremendously up in sales, but we’re not tremendously down either.”
Real-estate woes
One of the biggest challenges for Kahala and other restaurant franchises has been real estate.
In some instances, franchisees who moved into shopping malls and neighborhood strip centers are struggling because major tenants around them closed.
Kahala has had some success with negotiating for cheaper rent on behalf of certain franchisees, Knowlton said.
Some franchisors have started buying back distressed stores from their franchisees.
Tropical Smoothie Cafe, a Destin, Fla.-based franchise that sells sandwiches, wraps, salads and fruit drinks, reopened two East Valley franchises in the last year.
The operator of a location at 4015 S. Arizona Ave. in Chandler struggled to bring in traffic because of vacancies in the retail center in which the store operated, said Scott Palmateer, a regional franchise consultant for Tropical Smoothie Cafe.
The other location, 1130 W. Grove Road in Mesa, had similar issues, he said.
Palmateer said the company believed the locations were still viable, so it bought out the franchisees and reopened them.
“It’s the very first time that we’ve done anything like that,” Palmateer said. “Our intention is to not own and operate these. We want to . . . find a franchisee that’s interested in buying those and put them in a good situation.”
Bucking the trend
Non-retail franchises and those not as dependent on real estate were still strong.
Home-based business, senior care and technology franchises continue to be in demand, Johnson said..
Two locally headquartered franchises riding that wave are Speedpro Imaging and Synergy HomeCare.
Speedpro, founded in 2004, sells imaging shops that produce vehicle wraps, exhibit-booth signs and other marketing materials.
The Scottsdale-based company’s 31st franchise recently opened. About eight more franchises are under development, said Chief Executive Officer Blair Gran.
While some companies have reduced the franchise fee they charge buyers, Speedpro has increased its fee.
As of Jan. 1, the total turnkey price to open a Speedpro franchise is $179,000, Gran said. The price previously was $159,000.
The company decided to raise the price based on research showing the brand was undervalued, Gran said.
The company has had success attracting franchisees who have left corporate jobs.
“The model has been designed to be driven by an executive-level person,” Gran said. “They’re done with corporate America and they want to build something. They like the scaleability to our model. They like the ability to have no glass ceiling to that growth.”
The chain’s same-store sales increased 12 percent from January through November 2008 over the same time during the prior year, he said.
Peter Tourian, CEO of Gilbert-based Synergy HomeCare, said his company has experienced similar growth. Slashing fees or offering buy-one-get-one-free deals to prospective franchisees is not a strategy the company has considered, he said.
“The system is so strong and our franchisees are doing so well,” said Tourian, who started franchising in 2005. The company’s current franchise fee is $35,000.
The company has 56 franchises in 26 states. The chain provides in-home services for the elderly, including companionship, medication reminders and meal preparation.
“Those kind of things have very long legs,” Johnson said.
“They’re not trendy and they have the potential for good middle management . . . folks that communicate well and know how to solve business problems.”
