FranData: Franchise Development Challenges in 2008

(FranchisePick.Com)  Source:  FRANDATA

Franchise Development Challenges in 2008

Against a background of greater economic uncertainty in 2008, will franchise development become more difficult? In a word, yes.

To be clear, the franchise business model is alive, well, and growing. This decade’s accelerating growth in units and expansion of companies embracing the franchise business model are testament to that.

However, it appears that more challenging times are awaiting us in 2008. Here are some of the reasons why and suggestions what franchisors can do about it.

Availability of Financing

The franchise community is significantly fueled by the ability and willingness of banks to provide debt capital to franchisees. Most banks still have the ability. However, their willingness, in the form of tightened underwriting criteria, has changed. In the past 12 months, we have seen significant changes to loan-to-value ratios, collateral requirements and cash flow coverage ratios.

Banks are increasing their due diligence, not just on the franchisee borrower but also on the franchisor and franchise system. In face of more adjustments as bank credit departments assess changing risk profiles, here’s what franchisors should do:

• Align and regularly compare their franchisee screening criteria with what banks are requiring
• Talk to more banks to open up alternative sources of franchisee loans
• Make it easier for banks to do due diligence and say yes by creating (or have an objective third party like your friends at FRANdata create) comparative performance reports

Did you know…

FRANdata can help you benchmark your franchise’s financial, growth, and operational
performance against your peers? If you’d like an objective assessment of how you are
doing, please contact us at 800.485.9570 or email Edith at ewiseman@frandata.com.

Competitive Challenges

In addition to credit challenges, there are a couple of longer term trends that also will influence franchise development in 2008.

*2006 numbers are estimated

• More franchise brands are competing for franchisees
• A new post baby boomer generation of franchisees is emerging
• More and more franchisees are multi-unit operators

How does a franchisor stand out in this more crowded and competitive environment? Think beyond just the appeal of the brand and to performance measures, like training, system stability, and unit performance, that will stand out.

This applies even more to the incoming franchisee generation. Many boomers are starting to retire. Next up, the Gen X group (births between 1965 and 1980), is considerably smaller than the boomer group. However, behind the Gen X group is the Gen Y (or Millennial) group, which is even larger than the boomer group and just hitting stride in the work force.

Attracting Millennials, who may have the financial support of their boomer parents, requires re-examining the development program from top to bottom. This generation thinks and acts differently and their interests require a different type of development marketing.

Similarly, multi-unit operators require more sophisticated and detailed information about franchisor and system performance. They already control half of all franchise units. By definition, these operators are experienced and require sophisticated and detailed information about franchisor and system performance, not just marketing materials.

While we remain optimistic about unit growth in 2008, we also believe that it will take more effort and a re-evaluation of current development strategies, to hit the same performance targets that were previously achieved.