Buying A Franchise May Have Become More Difficult

According to the November 15th Wall Street Journal (WSJ Small Business Report, November 15, 2010), Emily Maltby, a staff reporter for WSJ, states that for “entrepreneurs, it’s getting tougher to get in on some franchises these days.”  According to Ms. Maltby, with the economy still sluggish, franchisors are making standards for prospective franchisees more difficult.  More up-front cash is required along with a proven track record of experience in that business area. The article discusses and quotes Popeye’s V.P. of Development, Greg Vojnovic, a fast food chain operated by AFC Enterprises Inc. as saying that in late 2007 they started feeling “a mushiness in the market”.  They made a corporate decision that prospective franchisees with business knowledge are better able to handle a tough economy.  Based on that conclusion, Maltby reports, Popeyes started requiring that all potential franchisees or their business partners have previous restaurant ownership experience.  Popeyes even visits their existing businesses to review their existing operations and financial strength, among other things. According to Mr. Vojnovic, this strategy has paid off for them, with franchisees that were brought in to their system with that criteria proving to have stronger sales than those that were brought on board prior to that system. An added benefit, he states, is that lenders are more anxious to finance the new locations.

Anyone in the franchise industry is aware of how difficult it has been for franchisors to find qualified prospective franchisees and particularly those who are able to obtain financing for the franchise.  Banks looking at franchise loans, according to Ms. Maltby, consider not only personal financials, but also industry experience.  In addition, many franchisors are now requiring at least 30% down payments from the prospective franchisee, which could amount to substantial amounts of out of pocket funds.  The article reports that Zoup Fresh Soup Co., now requires candidates to have at least $150,000 in cash and $350,000 in net worth with a credit score greater than 700.  This is a substantial increase over prior years. Zoup also requires that new owners be present on a day to day basis to manage their business, and absentee owners are no longer permitted for new franchisees.

What are your thoughts on this new trend in franchising? Will this slow down the growth of some of the established franchises? Let me know your thoughts.

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