What Coronavirus Means for Franchise Brands

Tuesday, March 24, 2020; 12pm-1pm

What Coronavirus Means for Franchise Brands

Panelists: Charlie Chase / David Barr / John Teza, CFE

Webinar Summary –

In the “What Coronavirus Means for Franchise Brands” webinar, IFA Immediate Past Chair David Barr, John Teza, and IFA Vice Chair Charlie Chase discussed their approaches as franchisors while they deal with scaling down operations, cash flow, brands health, and planning for the near term due to COVID-19. The panelists urged franchisors to carefully plan for the short-term realities and to remain nimble to respond to the needs of customers and consumers. The panelists recommended a planning framework that emphasized education, collaboration, and communication over and above how franchise brands would normally train and talk to their franchise systems and teams.

Key Bullets –

• Asymmetrical impact of health crisis and non-essential business closures affects businesses and geographies differently – be prepared with information on the needs of different jurisdictions
• Enact downside planning that serves guests and employees in a way that accounts for near-term realities and scaled-down operations
• Create different operating maxims to match the moment: Educate, Collaborate, Communicate. Educate = understand the realities/limitations; Collaborate = work constructively with franchisees and systems to meet their needs; Communicate = clear and transparent distribution of information.
• Franchisor plans and action to ensure stable cash flows allow franchisees to look to system leadership, and those tools and guidance can be utilized by franchisees.

Full Bullets -

• David Barr: What should Franchisors be thinking about today and tomorrow
  • Cash Flow for franchisor à different ways to look at cash flows; concern for emerging brands today
    • Royalties
      • Franchisees are down 20% so royalties will be down 20% - you must be careful to assess the viability of the franchisees given how far they’re down; what is their capacity to pay royalties. Assure they have cash flows up to August/September. Typically cash flow planning wasn’t done on the front end
      • Initial franchise fees have dried up
    • Expenses
      • Personnel
      • Franchise Dev – are you going to continue to spend money in these areas
      • Training
      • Marketing
  • Franchisee assistance – how do franchisees remain viable?
    • Assisting franchisees with cash flow projections
    • Liquidity
      • Contract review
        • Contract reviews, reaching out to landlords, abate certain contracts, work with franchisees as they work with those contract providers
      • SBA Disaster Loans
        • EIDL loans available on the SBA website – loans up to $2 million based on current needs from a liquidity standpoint
      • CARES Act
        • Congress debating the CARES Act
        • Loans will be available through this legislation that allows more multi-unit franchisees to qualify even if they’re above the typical small business threshold
        • Can apply for SBA 7a loan
        • Second step of loan forgiveness – up to 2.5x of payroll
        • Can’t double dip in loan funds
• Tomorrow – this will change brands in the future
  • New standards about cleanliness will emerge
  • Communicate with your customers and consumers – how do you keep your customers connected online and when they aren’t present
  • Staying relevant to customers’ needs
  • Franchisee assistance – engage in digital way
    • Relaunch – opening and re-opening

• John Teza:
  • Asymmetrical impact of this virus – not all geographies are affected in the same way
  • Some brands are totally shut down; no revenue
  • Some businesses in good position from a cash perspective, some are not
  • Phase three planning: optimizing for short term reality
    • Downside planning – serve guests and employees in a manner to beat forecasts
    • Off premise modes – rolling out third party delivery to systems – be nimble and consider new thinking to safely serve communities
    • Turn operating models on their heads if need be
    • Need a business that people can come back to at the end of this

• Charlie Chase:
  • Oversees a portfolio of home improvement brands
  • 50% locations are operating, 50% are not.
  • Different operating maxims
    • Operate within our values – discrete values that we hold in crisis or not
    • Compared with what people have been involved with in the past – using comparisons of this with how others have coped with challenges in the past
    • Framework – educate, collaborate, communicate – understand the reality, collaborating for their reality, and overcommunicating by a factor of 10 with respect to what’s going on
  • Some think it won’t affect you, but other parts of the country
  • Bottom-up and top-down thinking – board support and moving into the shoes of people on the ground
  • 2.5 weeks ago we had operations where some franchisees were using unemployment to keep people paid, because they knew 3 weeks of no revenue would knock them out
  • What does leadership stand for in your world? How do you provide words, leadership and guidance to keep people focused?
    • Agility – keep your knees bent
    • Accuracy – facts, history to guide what’s ahead
    • Transparency – we want people to know what we are doing, so that the rumor mill isn’t spun up; keep everyone informed and clear on what’s going on
  • Words matter – language is important. Don’t use phrase shutdown/closedown. Use “scaling down” to a certain level. Think of middle period as rest, recuperating, retraining so that you can scale up and regain what you’ve lost

• Having a well-defined plan, where you can articulate into and through that plan
  • Communicating where you are today and tomorrow
• Take care of business quickly and definitively, and push those tools down to our franchisees who need to go through this same experience
  • Put your oxygen mask on first, and then put the oxygen mask on your franchisees
• Believe in what you’re doing so strongly that other people are inspired to do what you’re doing
• What’s the virtual version of a store walk or market walk? Perhaps it’s a webinar, but we need to find new ways to reach out – David has encouraged more teams to reach out via Zoom or GoToMeeting
• Charlie is reaching out to 4-5 franchisees a day – communicating safety, checking in on their families, and people will appreciate and respect the time taken
• SBA loans:
  • Disaster recovery is typical SBA program (hurricanes, tornados etc.) à looking at liquidity and what immediate needs are due to disaster; no unemployment consideration, and personal guarantee required
  • CARES Act: Loan based on payroll, debt, utilities, lease. Look back on operations; no personal guarantee
    • Based on your employment this year versus last year
    • 80% of employment, you’ll get 80% forgiveness
    • Do the right thing for your business, how much you need on the loan and however much gets forgiven on the backend does
  • IFA has other specialists who will provide more information on this in the future
  • You can’t double dip in loans
• Any litigation expected from franchisees?
• How do you handle franchisees who are asking royalties to be waived? Monthly minimums etc?
  • Everyone is taking a different approach
  • How does the brand get to the other side? Forms a basis of discussion with franchisees to how to chart a course through the crisis
  • There are few people who have the balance sheet of big franchisors
  • Encouraging people to sit down and make good business cases with landlords, vendors, and franchisors. Have a conversation with franchisees to say “we’re in this together” and for viability together over the longer term
  • When units are closed, then royalty minimums are being waived
• What do about rent if revenue is down?
  • Urging communication with landlords about the fact of liquidity
  • Recommend to franchisees to have a discussion with leases and vendors – promote dialogue
• Do franchisors acquire the unit?
  • All franchisors will be faced with those decisions internally and externally
  • Now is not the time to undertake that question
  • Later is the time to discuss picking up distressed units
  • No certainty around the length of this – if we knew it were a month or that a stimulus package would provide relief for a fixed time then we would be in a better position.
• China isn’t back à we’re seeing a public debate about health versus economic health. Even if the government said you can re-open, does your consumer come back? Assess your plans and be honest about what your situation is
  • You won’t see a full complement of customers until the number of people dying is off the nightly news. So be realistic about an August-September timeline for your liquidity and cash-on-hand
• We don’t know what norms will shift on a go-forward basis – social distancing etc
  • The only other comparison we have is 9/11
  • We’ll get through this, and not jump to conclusions about what the impacts will be; we need to focus on what do know in the moment
• Put yourself in the shoes of front-line workers and get them liquidity as quickly as possible