How Does Franchising Work?
Franchising is an arrangement where a name brand company grants a local entrepreneur the right to use its business name, trademarks, and processes to produce and market a good or service. The business owner usually pays a one-time fee and a percentage of sales revenue as royalty. Typically, the brand provides national advertising and support, while the independent owner is responsible for day-to-day operations of the business, including hiring and scheduling employees.
What Kind of Businesses are Franchises?
Franchises are found in nearly every sector of the economy. Prior to COVID-19, America had 733,000 franchise establishments that employed more than 7.6 million Americans. Less than half of all franchises are in the food and beverage industry. Other major sectors include home health care, business services, hotels, auto repair companies, child care, dry cleaning, and personal services companies like gyms, exercise studios, salons, and spas. According to an IFA survey, 74% of franchise businesses in the country are closed due to COVID-19.
Aren’t all Franchise Owners Big Businesses?
No, in fact the vast majority are small business owners in every sense. According to industry research firm FRANdata, 75% of all franchise owners have fewer than 20 employees. Franchising is also more diverse than non-franchise businesses: according to U.S. Census data, nearly 30% of franchises are minority-owned, compared to 18% of non-franchised businesses.
Why Does This Matter for PPP Loans?
Under the CARES Act, franchise businesses can apply for Paycheck Protection Program (PPP) loans on a per-location basis. That allows for independently-owned and operated franchises to apply for PPP loans; without it, these independently-owned franchise businesses who operate under the same brand wouldn’t be eligible since only one business in the franchise system could apply. As with all PPP loans, loans going to franchise businesses require 75% of the loan amount to be spent on employee payroll.
Aren’t Franchises Getting PPP Loans at a Faster Rate than Other Businesses?
No. The International Franchise Association conducted a survey of its membership and found that only 11% of franchise owners have received PPP funding. These are small businesses that are trying to keep their employees on payroll but cannot do so because they do not have funding and do not have customers to bring in revenue.
Additionally, the survey results show that many of those who have had their loans approved are still waiting for their funding. Without these funds, many franchise businesses will be unable to make payroll and pay other business expenses, like rent and utilities.
Aren’t All Chains Franchised?
No. Some chains, like Shake Shack and Starbucks, are wholly corporately owned. When a corporate chain applies for a PPP loan by location, all the loan funding goes to the corporate entity.
Can Franchise’s Corporate Office Receive a PPP Loan? What Happens Then?
Some small and midsize franchise brands may have corporate offices with fewer than 500 employees. Since the corporate business is a separate business than its franchisees, the corporate office may be eligible for a PPP loan to ensure that corporate office employees can remain on payroll. Some franchise brands can take loans on behalf of locations they operate directly. Additionally, this funding is regularly used to provide royalty relief or other assistance to franchises so that franchise employees can also remain on payroll.
Is IFA Asking for Changes to the PPP Loan Program to Ensure Greater Eligibility for Small Businesses?
Yes, IFA’s goals for the PPP loan program are outlined in this letter from the Economic Innovation Group. They are focused on increasing access and effectives for businesses who need PPP loans.
Additionally, IFA hopes that companies with access to other funding options refrain from using the PPP to preserve it for the small businesses, franchise or otherwise, who need it most.