The Future of Restaurant Franchising

    How the global pandemic is changing the face of the franchise space.

    Building blocks with Covid-19 icons threatening restaurants franchising.

    Franchise business Cubes: istock.com / eakrin rasadonyindee. virus: istock.com / designer29, hourglass: istock.com / musmellow, Social distancing: istock.com / Lubo Ivanko, checklist: istock.com / Roman Bykhalets

    Even as deals move forward, franchises are facing new challenges.

    Like every other segment of the quick-service industry, franchising has been altered by the COVID-19 pandemic and economic downturn. However, the unique structure of the franchising business model means that long-term impacts are difficult to predict.

    During normal operations, it can take 6–12 months for a franchisee to close a deal and open a new store. Now, however, social-distancing guidelines have introduced construction delays, further extending those timelines. Yet despite the unpredictability of an industry in flux, franchising consultants are seeing trends emerge that hint at what franchising may look like as the pandemic unfolds and, eventually, is put behind us.

    One of the most notable trends today, says Wes Barefoot, president of Path 2 Freedom and franchise consultant for FranChoice Inc., is that while some potential franchisees are worried about the future, most serious candidates are optimistic.

    “Though we don’t know what the ramifications of the pandemic will be, these buyers realize it won’t last forever, and buying a franchise won’t happen in the next month—it’s a long process,” he says. “Educated candidates see it as a great time to go through the investigative and due-diligence process.”

    Similarly, Mary Ann O’Connell, president of FranWise, says she’s seen a “small surge” of qualified candidates, but it’s too soon to tell exactly what this means for franchising. “We don’t know what we don’t know yet,” she says.

    What is causing this uptick in applicants, however, is just one of the many unknowns. Barefoot posits that it could be due to rising unemployment, which in turn is strengthening the pool of talented franchisees looking for new opportunities. Or, counterintuitively, some favorable conditions have emerged from the pandemic, like prime real estate availability amid business closures. With properties available, franchisees also have more leverage to negotiate terms with landlords. Additionally, though unemployment is high and stock markets are volatile, Barefoot says funding is not as difficult to find during the pandemic, and many organizations, including the Small Business Administration, are offering more flexible terms on loans.

    Though it may seem like a small consideration, many franchisors are moving discovery days into the digital world. Cassidy Ford, account director at FRM Solutions, says that while franchisees will still eventually need time in the kitchen and face-to-face meetings, digital discovery days are saving franchisors money, speeding up the franchising sales cycle, and making it easier for candidates to engage.

    Yet no matter the cause of the surge in candidates, Ford says this deeper talent pool is a boon to franchisors, which can now be more selective than they were just a few months ago.

    “It’s evident from the number of franchisees that went under so fast that many franchisors were accepting any candidates who could pay for a franchise,” Ford says. “But now franchisors are looking at more factors when selecting franchisees, many of which are intangible. This will lead to higher-quality franchisees that will contribute to the brand’s success.”

    Each brand’s approach to these new, fuller talent pipelines, however, is different. O’Connell says she sees some franchisors closing deals now, while others are staying in touch with prospective franchisees but pausing deals to assess the situation. Ford notes that many brands are still recruiting franchisees, but they are making plans for late 2020 and early 2021 instead of focusing on shorter-term prospects.

    Yet even as deals move forward, franchises are facing new challenges. For example, because COVID-19 caused such a quick, dramatic drop in sales across the entire foodservice industry, financial disclosure documents created just a few months ago are already out of date.

    “What happened in the past is not reflective of their current disclosures, so some [brands] have expressed concerns about inherent liabilities from the numbers they are currently disclosing,” O’Connell says. “If a brand is doing 60 percent of its former business load, that changes everything, and could for a long time.”

    This causes difficulties for candidates, too, who may not have updated financial information when selecting a brand. However, this national crisis is also making it easier than ever to measure how well franchisors manage one of their most essential duties: supporting their franchisees.

    “The great thing for candidates is that it will become obvious which brands are running without strong leadership and systems, and which aren’t focusing on franchisees,” Barefoot says.

    For franchisors, however, figuring out how to best support franchisees is the hardest challenge they face, O’Connell says. “This is very complex. What is best for the franchisees, the employees, customers, and the franchisor? They have to guide the franchisees through reopening, permanent changes, and customers’ perception. This will be a long game, and the brands that are true to core values will fare the best.”

    Both Barefoot and Ford recommend candidates talk to existing franchisees and ask how the brand is supporting them during the pandemic. Both say candidates should weigh whether the concessions being made are sustainable.

    “Franchisors should do everything in their power to help franchisees, but the franchisor still has to make sure the brand survives,” he says. “If franchisors make too many concessions, it could hurt franchisees, too.”

    Though some brands have given franchisees payments to help offset sales losses, Ford recommends franchisors make operational plans for takeout and delivery or design a mobile app that helps franchisees give customers quicker service while minimizing contact—all changes that can help stores make more money than they would have gotten from a one-time payment.

    Franchisees, however, will also be mindful of whether the brands they invest in have infrastructure in place for contactless service, Ford says. And, most importantly of all, brands will need to assure candidates that they have several contingency plans in place depending on whether or not COVID-19 cases spike again in the fall.

    As the industry grapples with questions about what it means for chains to serve their employees and communities safely while maintaining financial results, all that is certain is that restaurants as a whole will not be returning to normal operations anytime soon. And now, franchisees and franchisors have to face this uncertain future together.

    “Right now it seems like the world is ending and the franchise model is on a precipice,” Ford says. “Both franchisees and franchisors just have to keep putting one foot in front of the other and keep their heads up.”