As Competition for Franchisees Heats Up, so Do Incentives

Chains offer big inducements to get prospective buyers to sign on

Wine & Design CEO Harriet Mills (bottom center) with franchisees

The franchise market is getting crowded—and lots of brands are trying to get the attention of potential franchisees by offering big incentives.

Over the past few years, a host of franchises have sprung up in all sorts of niches, from restaurants to health care. The result is a buyer’s market, and chains are piling on incentives to stand out. Many new or small chains are offering such inducements as discounted franchise fees and reduced royalties, to ease the way for first-time buyers who have trouble landing financing. Larger chains with more name recognition are mostly targeting incentive deals at existing owners with multiple stores.

Experts don’t expect the incentives to go away anytime soon. “As franchisers continue to see more competition going after a franchise buyer pool, they’ll have to differentiate more,” saysDavid Nilssen, chief executive and co-founder of small-business financing company Guidant Financial.

Among the incentives he has seen are franchisers not charging royalties on the first six months of revenue and chains contributing $10,000 to the grand-opening marketing package if a buyer opens a second store in under a year.

At small franchises, incentives can make a huge difference in spurring growth. In 2013, Buffalo Wings & Rings awarded three locations. In 2014, after slashing the franchise fee to $5,000 from $35,000, the Cincinnati-based sports-restaurant chain awarded 17.

Franchisees can pay up to $2 million to buy and set up an outlet, says Director of Franchise Development Dan Doulen, “and in the grand scheme of things, $30,000 doesn’t seem like a huge amount—but it is to those investors. They think about every penny they spend.”

Incentives are also a way for small chains to get buyers to try out secondary markets, saysNick Powills, chief brand strategist for No Limit Agency, a Chicago marketing firm that has worked with Buffalo Wings & Rings and other franchises. If the Chicago market is sold out, for instance, a small chain might offer buyers better deals to target smaller Peoria, Ill.

At Wine & Design, of Raleigh, N.C., founder and CEO Harriet Mills offers franchisees an interest-free loan of up to one year to cover their initial payment of $25,000. That allows buyers who don’t have a big lump sum on hand to defer the payment until the business gets up and running, she says.

“It has allowed a lot of our franchisees to put the money into building their companies,” she says. “They no longer have to eat cheese and crackers to survive.”

For successful franchisees, Ms. Mills offers second locations at half off the initial franchise fee. “We know them, and we want to give them the opportunity to grow,” she says. “They have shown their loyalty to us. So, this is how we show our loyalty to them.”

The company, which hosts parties where guests create paintings while sipping wine, currently has 62 locations.

The incentive system takes on a different shading at big chains. “The big franchisers tend to grow with existing franchisees, and by virtue of their popularity and success, are less likely to need to offer incentives to new franchisees,” says Burton Cohen, who teaches strategic franchising at the Kellogg School of Management at Northwestern University and is managing partner of a franchise-consulting firm. “That said, large franchisers are offering incentives to existing franchisees to upgrade their facilities and undertake other programs to help competitiveness.”

The big get bigger

Big chains, he says, are also seeking out well-financed multiunit operators—whether they own stores in the same chain or in others—to either buy out existing franchisees, buy company-owned operations or acquire rights to expand in underdeveloped markets.

Denny’s, for one, gives new franchisees a break of up to $1 million on initial fees and other costs if they develop six new restaurants “within a reasonable time frame” in new and emerging markets. “The opportunity to grow market share through more new development in low-penetrated geographic areas is very attractive,” says Steve Dunn, senior vice president and chief global development officer. “Our current incentive program is offered to attract new growth capital and experienced operators primarily in regions east of the Mississippi River.”

Do these incentives make a difference even for well-heeled multiunit franchisees? “The wealthiest people in the world still want the best deal,” says Mr. Powills.

Ms. Garone is a writer in Alameda, Calif. She can be reached at reports@wsj.com.

Corrections & Amplifications

In 2013, the restaurant franchise Buffalo Wings & Rings awarded three locations. An earlier version of this article incorrectly said the chain awarded one.

Source:WSJ