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For franchisors and franchisees, nothing beats the vibe of a fully-charged, fully-driven franchise system. The feeling that everyone is united, behind the brand, in-sync with the common goals and ready to move full-steam ahead is what every franchise system strives for, franchising utopia, if you will.
For many systems, this feeling of an energized franchise brand is synonymous with growth. Everyone wants to feel that their system is alive, moving forward, in terms of franchise sales, improved unit economics, brand positioning and product/service offering.
But is growth in the form of franchise sales realistic at this time, in this economy, during this credit crunch? Is aggressive franchise development a worthwhile distribution of time, energy and resources, or are franchisors only setting themselves, prospects and sales teams up for disappointment and frustration when the banks fail to come through with financing?
The Answer: There is no better time than the present for selling franchises.
Now is the time to move ahead of your competitors. Increased market share can be yours now more than ever. If franchise sales remain a priority during a downturn, your franchise will emerge from the recession with a stronger presence, improved morale and a "nothing can hold us back" attitude that will be contagious throughout the system. Not to mention, added franchises will mean an influx of franchisee fees, new streams of royalties and other revenue that can be used to improve internal operations and enhance national marketing funds, other factors that can guarantee your franchise will continue to move ahead.
The Caveat: None of this is possible by relying on the same avenues of financing that were available pre-recession.
Prospects that banks were competing to lend to a few years ago are now being turned down, flat. Even proven multi-unit operators are being denied financing, and, as we know, the ability for successful franchisees to keep opening new locations is crucial to a system's growth.
Instead of throwing in the towel, let's look at the facts. You want to sell franchises, you need to sell franchises, but the banks just aren't coming through. That's why franchisors need to create recession-ready financing options now more than ever.
The first step in creating recession-ready financing solutions is by seeking out atypical financing partners, such as equipment suppliers and other vendors that have a vested interest in the continued growth of your franchise. As it has been established that Americans are facing one of the tightest credit markets in the past 30 years, home-equity loans, SBA loans and other financing options aren't being granted unless the prospect has a credit score in the upper 700s, not to mention a host of other assets and indicators.
This is why dynamic, pro-active franchisors are looking to new means of financing that make sense in this economy. To provide an illustration, Snap Fitness recently pioneered a recession-responsive financing partnership with its leading equipment providers Cybex Capital (Cybex Fitness Equipment) and Franchise Finance (Matrix Fitness Equipment) to serve as a financing option for current Snap Fitness franchise owners that wanted to open additional locations.
With approximately 1,700 locations in operation or under development worldwide and plans to open 300 to 400 new clubs each year, our company was not ready to put franchise sales on the back burner just because banks weren't coming through.
Once your franchise has made the decision to start spearheading alternative financing solutions, remember that the continued solvency and growth of your franchise is important to your vendor's bottom line. Chances are your vendors have already lost contracts and clients to this recession, placing an even greater value on your franchise's continued relationship and patronage of this particular vendor.
To that effect, like our partnership with the equipment providers, is it very feasible that you and the vendor can figure out a mutually beneficial relationship. For instance, Cybex and Matrix continue to sell equipment to hundreds of Snap Fitness franchise owners, and Snap Fitness continues to sell and open hundreds of Snap Fitness locations thanks to the added support, in the form of financing, by Cybex and Matrix.
Now that wheels are spinning in terms of atypical financing solutions and you're probably jotting down a few vendors and suppliers that you will be contacting, depending on the size of your franchise and the scope of your new financing initiatives, you might want to consider creating a separate financing division to handle inquiries and get your financing partnerships off to a running start.
We created a new division, Snap Fitness Finance, and hired a finance director who was well versed in both financing and franchising to head the program. Although money's tight for everyone, to keep your system growing, you will have to invest in financing during this recession. No matter what franchise you own, it is impossible to grow without financing options and alternatives so do not be afraid to invest in new financing programs that will keep your brand moving forward.
Once newly-created financing options are a reality, here's where the fun begins. Now that financing is essentially in-house, the franchisor will have a much stronger hand in who gets financing and who does not, allowing the franchisor to provide financing to franchisees that will be a benefit to the entire system.
Whereas banks will determine who gets funding based on a credit-risk file and other line-item factors, franchisors providing in-house financing can focus on factors that make sense, such as the franchisee's proven ability of running a franchise profitably and following the franchise's proven business model.
We focus our in-house finance division to benefit existing franchisees that are looking to expand into new club locations. By doing so, we are able to offer equipment financing for successful operators with a history of demonstrated cash flow and memberships at existing clubs. It makes sense to invest in the people whom you already have faith in, the people who have already and will continue to invest in your brand.
Naturally, it is also less risky to invest in a proven performer than in a new-to-the-system owner. Like any start-up initiative, recession-responsive financing solutions carry inherent risks. Be ready for a learning curve, and remain steadfast in your brand's commitment to an entrepreneurial spirit. Keep in mind that everyone is going to learn together throughout the process, but at the end of the day, the franchisor, vendor, and franchise owner are all focused on the same end result-strategic and profitable growth for the entire franchise system no matter the economic climate.
Quick Tips for Establishing Recession-Ready Financing
* When first launching these new financing solutions, you might want to choose a proven franchisee to serve as the "test subject" for the financing benefits. At Snap Fitness, we worked with a franchise owner in Pennsylvania who owned three very successful clubs and wanted to open his fourth, but banks weren't giving him credit. He was an ideal fit for Snap Financing, and once the initiative worked as planned with this owner, we unveiled the offering to the entire system of current franchise owners.
* Once the credit market loosens up and your franchise finds more and more franchisees able to use their own lenders, by all means, let them. Atypical financing initiatives do not have to be a permanent aspect of your business model, remember, it is a recession-responsive solution.
* The benefits of creating recession-ready financing initiatives are two-fold: Franchisees get their locations open sooner and the quicker they can get their franchises open, the sooner they can hit the all-important break-even point. Creating these financing solutions is just another way that a franchisor can seek to accommodate the needs of its franchisees.
* When offering in-house financing, it is best to finance equipment, inventory, accounts receivable, a payroll provider, build-out costs, etc. The franchise fee, however, should not be financed.
Peter Taunton is CEO and founder of Snap Fitness. He can be reached at 952-567-5990 or ptaunton@snapfitness.com.
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