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Companies are cutting fees to attract new franchisees

CHICAGO (Reuters.com) - If youve ever envisioned yourself slinging hash or pouring coffee in your own restaurant, your dream just got a lot cheaper.


With revenues flowing more like molasses than water, franchisors are slashing fees in an attempt to entice would-be entrepreneurs to ditch their cubicles and strike out on their own.


Thats the strategy employed by Huddle House, a growing chain of family diners, which recently slashed its franchise fee by 80 percent - from $25,000 to $5,000 - and is waiving royalty payments for the first five months.


Its just one of many dramatic deals cropping up in franchising, an industry beleaguered by stagnant growth due to a lack of capital. Franchise concepts as varied as 360 Painting, a national exterior painting franchise and Sunbrook Academy, a fledgling developer of early childhood education centers, are reducing fees or providing other incentives to attract buyers.


"We have a lot of folks that are contemplating retiring or have retired from a corporate job," said Huddle Houses vice president of development Thomas Flaherty, who came over from fast-food chain Papa Johns last summer to help spearhead franchise expansion. "Theyre looking to invest. We also get existing restaurateurs from other concepts."


Huddle House is willing to take a hit on franchising revenues for the near term on the promise of growth, spurred in part by the incentives to new and existing franchisees. With many landlords and developers starving for occupants, operators are likely to see generous terms on sales, rents and build-outs to keep the expansion ball rolling, he said.


"Theres probably not been in modern history a better time to get land than now; so many vacant spaces across the country," said Flaherty, adding the 45-year-old chain, with more than 400 restaurants, opened 20 new stores last year and expects to sign agreements for at least 30 additional units this year. "Part of our growth plan is to get out there while the timing is good."


Flaherty said Huddle House will only offer the reduced rates until the end of 2010.


SLUGGISH INDUSTRY


Even with new incentives on the table, it takes a lot of dough to open a franchise. Huddle Houses start-up costs vary significantly by geographic region, said Flaherty, but typically - including the full $25,000 franchise fee - they have required initial investment of $600,000 to $1.2 million, for those operators purchasing land. Franchisees must have access to at least 25 percent of the capital costs up front; in addition, the company requires significant business experience.


Additionally, the overall outlook for industry is not rosy. The International Franchise Association, an industry trade group, is forecasting slow recovery with only marginal increases in jobs and economic output this year. In 2009, the industry lost an estimated 409,000 jobs and $5.7 billion in revenues, according to a report produced for IFA by PricewaterhouseCoopers LLP. Access to credit remains the primary impediment to growth.


"With a predicted $3.4 billion shortfall in lending to franchise businesses in 2010, franchise businesses are implementing innovative programs to help entrepreneurs get into franchising such as reducing up-front investment fees and other discounts, changing royalty payment schedules, and even self-financing," said Alisa Harrison, an IFA spokeswoman.


STILL A TOUGH SELL


In this sketchy economy, parent companies are spending a lot more time kicking the tires on potential recruits to ensure theyre up to the task of running a fine-tuned business model that requires sticking closely to the script.


"During the due diligence process, theres a lot of communication between the regional development person and the candidate," said Sean Fitzgerald, vice president of franchise development for Wireless Zone, a 400-store mobile retailer using the Verizon network. "They have a lot of homework to do."


Fitzgerald said interest in their stores has doubled since they offered to finance up to 50 percent of the $30,000 franchise fee and assist, along with Verizon, with build-out and marketing costs. The typical total investment is $125,000 to $150,000.


"If you look at our numbers from three or four years ago, our attrition rate has dropped dramatically," said Fitzgerald, noting the percentage of stores that fail is below 5 percent. "Weve hired a lot of key personnel in the organization to help with our growth."


The assistance is tipping the scale toward franchising for entrepreneurs like Chris Jourdan, a 29-year-old resident of Newburgh, Indiana.


Jourdan, who had worked at a Wireless Zone competitor prior to starting his own business, previously considered going it alone as an independent mobile retailer. But when he weighed the incentives from Wireless Zone, including a line of revolving credit to help ease the costs of maintaining inventory, franchising made more sense. He has managed to open up nine locations in just 12 months. "It really was a no brainer for us," said Jourdan, who said he has avoided taking on any debt. "The financing model was very attractive."



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