With the International Franchise Association projecting 14,000 new franchises opening this year, representing a 2.1 percent growth from 2011, the franchising industry is predicting strong growth for 2012.
With this large pool of prospective franchisees entering the market, senior care franchises as well as franchises in other industries, will use various strategies to stand out from the crowd. An example of this is by creatively counting the multiple revenue streams offered by their business, as I discussed in my previous post. Another is offering discounts on the franchise fee, or other special provisions, such as offering territories much larger than the normal parameters – or even waiving certain requirements that would actually benefit the new franchisee. While on the surface these may seem like great incentives for joining a particular franchise, you should ask yourself the following questions:
Why is this company offering these special deals? Franchisors may begin offering discounts and/or special deals for a number of reasons including limited remaining territories, weak sales and profitability numbers or other challenges in their system. Be careful and ensure that these discounts and special deals don’t get in the way of examining the core success and viability of the business system being utilized by the franchisees. Strong franchise systems that have solid unit level economics don’t usually resort to discounts or special deals to attract high quality new franchisees.
Who else are they offering these deals to? If a company is offering up-front incentives to sign with them, there’s a very good chance that they are doing the same for others – and who knows if your deal is better or worse? Also, these special deals and terms might be an indication that the franchise system is having trouble attracting new franchisees, which may translate into the franchisor lowering their standards by which new franchisees are judged. This is important because, at some point in the future, you will want to sell your business. If the system has recruited a lot of underperformers, the brand will no doubt be tarnished – and you may pay the ultimate price by being forced to accept a lower purchase price when you sell.
Why are they willing to negotiate? If a franchisor is willing to bend on core points of the franchising system for you (and probably others), this could hurt the franchising system as a whole. A franchise system is strongest when it’s unified, so if everyone has their own set of rules, the franchisor will be paralyzed to make changes and unable to quickly adapt to changes in the marketplace.
Fortunately, at Right at Home, we are not in a position where we have to promote special deals to find great franchisees. The only discount we currently offer is 10% off of the franchise fee to those who have served our country in the U.S. armed forces. This is part of the International Franchise Association’s Vetfran program, and we’re proud to reward these folks who have sacrificed so much. Other than that, it’s the same deal for everyone. As a leading home care franchise, our strategic plan is sound, we have a wide range of great territories still available, and our FDD can validate the financial performance of our franchisees.
Now, the disclaimer…while our performance justifies the investment today, I don’t ever want to say “never when it comes to offering special incentives! Especially not in the always on, always traceable world of the internet! The fact is that offering special deals and financing arrangements for franchisees can make sense in certain circumstances. For example, in the current lending environment and economy, doing some of these things might make sense for some of the higher investment businesses where traditional bank financing is required but unavailable. But no matter what deals or discounts a company offers, you must do your homework on the company (and the industry) to understand the underlying motivations for offering special deals and discounts to prospective franchisees. Don’t be swayed by these (often) one-time deals! In ten years, you won’t care that you saved a few thousand dollars on your franchise fee – and, if you’re like most, you won’t even be able to find the franchise agreement that you originally signed! That’s usually a good thing, because the franchise agreement is there to protect you. If you can’t find, it’s probably because everything is going well and you haven’t needed it!