How easy or difficult is it for franchisees to get financing today? How has the difficulty in getting financing changed the franchise industry
Rotche: It's easier. It's still a ways from easy. The Small Business Administration has made some pretty big changes to their [programs]. The community banks are starting to really get involved with small business so it is easier, but it's not what it was and to some degree that's not a bad thing. It's been regulated a lot more.
[Less money available has] a domino effect. Let's say if the business model required them to invest in a 5,500 square foot space and required X-thousands units of inventory and X-thousands of dollars for a construction build out, well, we know that it's harder to get money and the odds are the pool of people that are sitting around with that pool of money is smaller.
So what you need to do then is get the business model to work in a 3,500 square foot space. Unfortunately, this is where everybody suffers. You must go to suppliers and [negotiate inventory and supplies] for lesser cost. The smaller that initial investment is for that franchisee, the larger the candidate pool is. It's forced everyone to kind of right size their business.The other thing that happened in the franchise business is franchise brokers that were typically paid 70%-80% of the franchise fee -- some franchisors will give up 100% of franchise fee to the company that finds them a candidate because they know they will have 10 years of royalty -- now what's happening is people are starting to keep that franchise fee and not outsource everything and not bank on trailing royalty streams. How do you pick the right franchise system? Rotche: There are four main things I look at.
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