Keep pricing competitive: Grant Garraway, senior consultant for The Franchise Shop

Why wouldn’t you discount an initial franchise fee when times are tough and franchise sales for some brands are harder to come by?

Over recent months we have seen well established brands like Jumping J-Jays and newer brands like Hairdressers on the Move both give away a franchise as part of their marketing strategy. Do franchisors and their advisors think they have a product which does not respond to the normal economic laws of demand and supply? Everything else in today’s complex economy goes up and down based on supply and demand. Why not the purchase price of a franchise?

I am sure the shopfitters are trying to keep their prices down to keep getting work. We have seen evidence of shopping centre landlords accepting the need for rent to come down to keep their shopping centres full. The retail customers are certainly looking for value for money when they shop. I can see no valid reason for initial franchise fees being immune from this process.

That doesn’t mean everyone needs to discount. If a franchise network is still meeting its growth budget then no change is needed; the franchise is clearly competitively priced in today’s market.

Other franchisors are adding value to the price; for instance, spending part of the initial fee in additional advertising to help the new franchisee hit the ground running, or doing additional training, or adding some piece of optional equipment. There are many ways to skin the let’s add value cat.

What the tough times demand of a franchisor is they re-evaluate where their brand sits in the now crowded franchisor marketplace and ensure their overall pricing package is competitive and their franchise brand can still grow into the future.

Maintain values and standards: Sarah Allen, business development manager, Appliance Tagging Services

Tough times often prompt tough decisions, and sometimes the toughest decision can be when to make changes, and when to stick to your guns.

We have all seen (and maybe even used) special offers to help close a sale during tough times. In many cases this makes good business sense, particularly if this helps to clear old stock to make way for new but selling a franchise is not like any other sale. We are not selling a product or a service, we are in fact selling a brand, a system and even more importantly, the basis for an ongoing business relationship — one that needs to be nurtured and developed.

So, how does a loyal franchisee feel after 12 months of hard slog trying to build their business and recoup their investment, when suddenly the new kid on the block appears with a discounted franchise?

Like most other franchise organisations, ATS has been through a franchisee drought over the last six months, wondering when things were going to pick up. It certainly has been tempting to come up with special offers and deals to bring on new franchisees and we have discussed numerous options but at the end of the day we have grown our business with the support and commitment of our existing franchisees.

The last thing we want to do now is jeopardise our relationship with the very people who put their trust (and their hard earned dollars) with us.

There is light at the end of every tunnel and the challenging times we have been through wonÕt last forever. If we start to discount our fees, what else do we compromise? Do our values and standards follow?

We owe it to our franchise network to maintain our high recruitment standards and levels of professionalism in order to ensure that we don’t devalue our collective businesses in an effort to boost short term sales.

A good prospect needs a break: John Newton, founder, Jumping J-Jays

Australia and the world are facing unprecedented times. If a prospective franchisee has the attitude and drive to succeed and their financial resources are not in line with the bank’s new banking criteria, due to this economic crisis, then foregoing a franchise fee on start-up will still give Jumping J-Jays the ultimate goal: a royalty stream from the operations at that location.

Franchising is tough right now. There is uncertainty in the economy and the employment rates in this country have been the perfect incubator over the last few years for employees, and not franchise sales.

At Jumping J-Jays we are actually offering several free franchises: a $49,000 full franchise investment in some selected locations in Melbourne, Canberra and Adelaide because our system does not have franchisees on the ground to meet our customers needs. Our brand spreads across the entire country and our central booking office for jumping castles receives hundreds of enquiries every week that we cannot service without a franchisee in the region.

A good prospect in these tough times also needs a break. With the uncertainty all around my company feels privileged that we are in a position to allow a perfect start up to hard working couples that want to get ahead within our business for a lot less than in past years. It is temporary and it is only in selected under serviced states.

Fees finance franchisee support: Garry Williamson, The Franchise Centre

First of all, the initial fee. This is charged to a new franchisee when the franchise right to operate under the franchisor’s proven business system is granted.

As the franchisor will need to carefully select then train the franchisee and perhaps incorporate within that fee the right to operate within an exclusive geographic territory, in our opinion that fee should not be discounted. The franchisor will lose money in doing so and needs to ensure solid initial training is given so the new franchisee can get started with maximum impact.

Secondly, the ongoing franchise management fee. We believe this should be expressed as a fixed percentage of the franchisee’s actual weekly sales. If the new franchisee is struggling then if that management fee is, say, five per cent of their sales, in reality that will convert to very few real dollars for the franchisor anyway.

The franchisor, by tying their management fee to the franchisees sales, obviously has a vested interest in the franchisee’s sales and should work hard to help increase them, through frequent field visits and, if necessary, more selling skills and product knowledge training. Therefore if the franchisor reduces their fee percentage it is going to be even harder for them to provide that ongoing field supervision and other support.

We have often seen new and ill advised franchisors reduce or even eliminate their initial franchise fee to make the offer seem more commercially attractive but if they do so they are then putting themselves under financial pressure to provide solid training.

The ongoing management fee the franchisor charges should be used to co-ordinate meetings with franchisees who learn to share laterally with each other and, as we have said, to offer strong field support and lead with the example of proven field operators.

Fee policy must be consistent: Elisabeth Ritchie, lead partner — retail, franchising and licensing — HWL Ebsworth

Franchisors should as far as is possible keep the terms of the franchise agreements consistent for the following reasons: document management — it can be difficult to keep track of what the particular terms of the franchise agreement are if each franchisee has negotiated different terms; unconscionable conduct — a ground for unconscionable conduct is the extent to which the franchisor’s conduct towards the business consumer (i.e. the franchisee) is consistent with the franchisor’s conduct in similar transactions between the franchisor and other like business consumers (franchisees); harmony within the franchise system — franchisees all communicate with each other.

There may be disgruntled franchisees if some find out that others have far more favourable terms.

Notwithstanding the above, each franchise agreement is a stand alone commercial contract and the franchisor and franchisee are free to negotiate the terms of the arrangement.

The Franchising Code does not mandate the commercial terms. Commonly franchisors will offer a lower or reduced upfront or ongoing franchise fee in the early stages of development of the system.

In tougher times, franchisees may request the reduction in ongoing fees. This needs to be carefully considered and a policy developed for dealing with such requests. Any such policy should be applied fairly and consistently across the system for the reasons set out above. The reduction should really only be given as a last resort as it may hard to reinstate in full at a later stage if the franchisees get used to paying a lesser amount.

Any agreement for a reduction in ongoing fees must be carefully documented. It may be an agreement for a moratorium on fees or part of the fees; that is, the franchisees will pay the difference at a later date.

Alternatively, it may be a complete waiver. In either case the agreement will need to set out the period to which it applies and if necessary, reserve the right to reinstate the full fees or claim back the difference not paid during the moratorium.

Franchisors may also consider the obtaining of further security from the franchisee for payments due. If the franchisee is requesting a reduction in fees it is usually because they are struggling financially so the franchisor may seek additional guarantees or may seek a charge over property or assets.

Franchisees need a vested interest: Doug Downer, general manager, Frontline Recruitment Group

It’s never a good time to discount a franchise fee as this potentially devalues the brand, it sets a precedent and potentially gets other franchisees that have paid the full fee, off side. To use the argument that this is OK because these are tough times is nonsense — the franchising sector has been extremely competitive and it’s been difficult to attract franchisees for the past five years.

In our business of recruitment we are seeing first hand what is happening with the executive market. Unemployment is rising and redundancies abound, particularly at middle to senior management level and the market has significantly more potential franchisees considering franchising as an option.

The economy may be experiencing tough times but these should be golden times for franchising. Franchisors that discount or give away franchises not only impact the value of their franchise system but are indirectly sending messages to the wider market that franchising is somehow in distress.

Franchisors should consider other options to attract the right franchisee. Some successful strategies that our business has included are: providing vendor loan and financing options at the full value, offering try before you buy options where franchisees can receive their initial fee refunded within a qualifying period subject to the achievement of clearly identified key performance indicators, reducing the entry cost by taking a financial stake in the business that is realised upon sale of the business, and deferred payments and progress payments of the franchise fee.

All of these options are utilised to ensure that the franchisor gets the best candidate with the greatest potential for success and recognises that some prospective franchisees don’t have the finances to get started but have all the other desired attributes to become successful franchisees.

On a final point it is critical for franchisees to have a vested interest and potential exposure if the business doesn’t work, they need to have skin in the game because it is then that they work harder and really value their investment.