With the credit crunch hampering the ability of many potential franchisees to purchase a franchise, one franchisor is stepping in to help them bridge the gap. Domino’s Pizza Inc. is taking steps that go beyond the standard methods of direct franchisor financing to provide cash to franchisees in need.
"As banks, lending institutions and credit companies continue their vice grip on growth capital amid the current financial turmoil, franchisors are confronting the possibility that they may have to step in to keep growth on track," according to Nation’s Restaurant News.
Domino’s officials announced last month that it would offer "short-term financial support and solutions," including small loans and payment deferrals, for successful franchisees—called "A" and "B" operators by the company—looking to purchase additional franchise locations, particularly underperforming locations.
Still, “I don’t want to be a bank,” David Brandon, Domino’s chairman and chief executive, said last month on an investor conference call.
“It will never be my preference to provide financing to our franchisees,” he said. “We would rather keep our relationship with them focused on being the franchisor rather than their bank. However, we are wading through uncharted waters.”
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And with last week’s report that the GDP shrank 0.3 percent in September, the waters are only becoming increasingly troubled.
All lending from Ann Arbor, Mich.-based Domino’s would be evaluated on a case-to-case basis. Financing from the franchisor would be done in small increments and could include bridge financing or deferrals of royalties or other costs associated with franchise ownership.
Domino’s is the only franchisor so far committed to offering some of its own money to cash-strapped potential franchisees, though Burger King Corp., Tim Hortons Inc. and Sonic Corp. also appear open to the idea of stepping in to help franchisees, according to industry experts.
It is perhaps unsurprising that restaurants are on the leading edge of this potential trend. "Franchisees typically are the engine of growth at many restaurant chains," according to Nation’s Restaurant News. "By developing markets, breaking into new territories and opening new units, franchisees accounted for 62 percent of the total unit growth among Nation’s Restaurant News Top 100 chains during their latest fiscal years ended closest to December 2007."
In addition, traditional methods of direct franchisor financing—such as a franchisor paying a portion of the franchise fee—tend to be more common in the restaurant industry than in many other industries.
"Franchisors that participate in direct financing are generally larger franchises with established histories of successful store openings," according to FranFinancing.com. "Direct franchisor financing is most common in industries that require especially large amounts of capital and sometimes involve real estate, such as hotels or restaurants."
Direct franchisor financing is not limited to those industries, however. Express Personnel Services, Michelin Retread Technologies, Jackson Hewitt Tax Service and Hot Stuff Foods all offer direct loans to their franchisees, according to FRANdata.
"Direct financing also leaves new franchisees with more working capital to grow their business," according to Franchise Times Guide to Selecting, Buying & Owning a Franchise. And while there are myriad benefits to direct franchisor financing, it is still not common, and Domino’s is still standing alone in taking it further. But the times may call for other franchisors to follow suit.
Domino’s is also exploring new strategies for their own finances. Their primary lender was Lehman Brothers, the investment bank that went bankrupt and helped send the economy into a tailspin. Lehman "was responsible for commitments of up to $90 million under Domino’s $150 million variable funding notes. Domino’s said it held sufficient operating funds “for the foreseeable future” and that other lenders may be able to fill any gaps," according to Nation’s Restaurant News.