Economic downturns have historically helped companies that franchise out their stores, according to Emily Maltby, writing for CNNMoney.com, as unemployed workers invest savings and severances in new ventures, namely, their stores. In the current market, however, the credit crunch is holding entrepreneurs down.
"The number-one driver of franchisor sales is unemployment, because more people turn to franchising to do something else with their life," says Mark Siebert, CEO of franchise consulting firm iFranchise Group. "But given the credit situation, there's an inability to finance franchises, particularly the high-end ones."
Business owners who work in a franchise agreement pay royalties to the parent company for use of their brand in return for the support of the marketing, supply chain, operating procedures, and other infrastructure. Those support systems can fall apart if the franchisor files for bankruptcy. If franchise royalties fall, franchisors can find themselves struggling to pay their operating expenses, a problem made worse when they have trouble generating new franchisee locations.
For franchisees, a parent bankruptcy filing does not necessarily mean the end of the line. Companies as varied as Denny's, Boston Market, Days Inn and 7-Eleven each filed for Chapter 11, and all are still viable.
"Bankruptcy of the franchisor is not necessarily bad for the franchise system or franchisees," says Alisa Harrison, spokesperson for the International Franchise Association. "There have been cases where the bankruptcy and restructuring actually result in a stronger network of operators, with stronger financial management at corporate headquarters and stronger brand position." Before that, however, they must make it through bankruptcy.
In the best case scenario, franchisees continue on with business as usual, with some adjustments to help the franchisor boost earnings or reduce overhead. In the worst case, the franchisor can selectively wipe out certain stores to try and increase net profits. Franchisees typically have little input in this process.
In the case of Bennigan's restaurants, who filed for Chapter 7 bankruptcy in July 2008, franchise operators survived while the company-owned stores closed down.
"One problem with Bennigan's was that they had too many company-owned stores. When the economics changed, the company-owned stores were no longer profitable and they were losing money faster than the franchisees were paying royalties," says Siebert. "But even if they're not profitable, it's hard to actually lose money on a franchisee."
When bankruptcy changes franchisees into small-business owners, they need to put the word out that they are open for business even as their parent company sends out press releases downplaying the severity of the situation-which naturally makes things look even worse. Enduring supply problems can sometimes mean cutting out the middleman and working directly with vendors, one of many new experiences that await owners forging ahead on their own. If they are able to negotiate the perils, some owners find themselves enjoying their new independence.
Chet_Steven
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