Transcription

The Franchise Battle Against COVID-19 Webinar Transcipt

March 25, 2020 from 12:00 PM - 1:00 PM

PANELISTS

Jamie Adams, Chief Revenue Officer, Scorpion

Lane Fisher, Partner, Fisher Zucker

Brad Fishman, CEO, Fishman PR

John Teza, Principal, NRD Capital

Gary Robins, Vice President, Supercuts Franchisee Association

Charlie Chase, CEO, FirstService Brands

Sam Ballas, CEO, East Coast Wings + Grill

Matt Haller, SVP of Government Relations and Public Affairs, IFA

WEBINAR TRANSCRIPT

Jamie Adams: Thanks everyone for joining us. Here’s what we’ll be covering in today’s webinar:

  1. Share some valuable insights about how franchisors, franchisees, franchise investors, and suppliers have dealt and continue to deal with this current situation.
  2. Bring actionable information that you can consider implementing immediately in your business or with different suppliers and partners that you work with across your entire network.

  3. Finally, we know that the franchise community is just that—it's a community—and given the current environment, we believe community is more important than ever right now. We want to use this as an opportunity to create space and bring together the franchise community.

Matt Haller will kick us off with some updates regarding the new CARES Act legislation.

Matt Haller: Here’s a state of play regarding the CARE Act as of 3 p.m. ET, Wednesday, March 25th:

Late last night (Tuesday, March 24th), the US Senate announced that they have an agreement in principle with the administration to provide immediate relief for affected industries and additional resources for those facing unprecedented challenges right now.

The IFA has been focusing on two major buckets in this relief package:

Small Business Interruption (Paycheck Protection Loans):

These are loans that will be made available via the Small Business Administration lending programs and other qualified lenders. There will be around 350 billion dollars from the US Government to provide these loans. Generally, these loans are limited to businesses with 500 or less employees, but businesses with 500+ employees want to be eligible too.

The IFA was able to get a provision added to the bill that allows any franchise business to have size standards waived. Any franchisee or franchisor should be able to take advantage of the Small Business Loan Program.

These loans are designed to keep employees connected to businesses that have been forced to shutter by local or government mandated shutdowns. The goal is to keep employees connected to employers for the duration of this crisis.

One challenge will be the limit on the loan size, which will be 2.5 times the average monthly payroll and capped at 10 million dollars. A lot of franchisees have said that’s not going to be enough to cover their costs because there are many other operating costs beyond payroll.

The IFA has expressed this to the Senate, but the challenge is we’re dealing with a limited amount of money that they’re willing to put into the programs. In order to get the loan size where we’d like it to be, at 4 times operating costs, it will cost around 800 billion dollars to do so for all franchises and businesses across the small business spectrum.

This is a great first start, but the implementation of this will be tricky depending how quickly the regulations can be written. The Treasury and the SBA are to put out regulations within 30 days, but hopefully it will be sooner, because a lot of franchises won’t make it 30 days.

Treasury Department-Backed Lending Facility

There are 500 billion dollars authorized in the Cares Act Bill for medium and larger businesses who are affected.

There’s less detail on how you’ll demonstrate your ability to qualify, and there will be competition with much larger businesses (commercial and cargo airlines, contractors like Lockheed Martin), but there have been franchises interested in these larger loans.

There is concerning language requiring you to waive neutrality in a union-organizing campaign in exchange for taking money. It would restrict freedom of speech in communicating with your employees around union organizing.

One additional note for restaurant retail franchises: The Qualified Improvement Property issue that was a glitch in the 2017 tax law that would have moved retail and restaurant depreciation onto an accelerated 15 year schedule has been fixed in this current version of the bill and will be a huge win for the restaurant industry.

The bill is agreed to in principle, but there are a lot of technical issues still being addressed today in real time. We are still optimistic this will happen, but hesitant to share too much on the fine print because there are a lot of problems that need to be ironed out today.

Jamie Adams: Thanks Matt for the IFA update on the new CARES Act.

John, NRD Capital owns several franchise concepts, and even a supplier or two. What tactics and processes are you deploying across all of your businesses to help them navigate this situation?

John Teza: We really approached this process in three phases.

Phase One was to understand what exactly is happening and get a clear view on what this disruption meant. The reality is it has evolved so much from the beginning. It became apparent pretty quickly that this was going from a revenue interruption to a complete shutdown, and we decided that we wanted to get aggressive and get in front of it.

We sat down with our portfolio companies over a three day period and said we need to plan for a drastic and meaningful reduction in revenue. We don’t know how long it’s going to be but we need to put some downside modeling in place to understand how long we can go given our current cash reserves.

Fortunately, a couple of our portfolio companies and all of our technology companies had really good cash forecasting tools in place. Those that didn’t, we drove that process down with them pretty quickly and asked them to work through the mechanisms from a cash perspective once we figured out the revenue implications. We really quickly worked through our management teams, through our boards of directors, and were able to put some definitive planning in place. We don’t know how long we’re going to run this way, but we’re going to run this plan for that time. It got us into execution mode very quickly. We came up with a plan that led them to some tough decisions, but we got working on a play really quickly.

In some cases, we didn’t need a whole lot from an organizational standpoint, we were able to maintain a majority of their workforce. In some cases where we had 100% revenue interruption, it meant a different course but because we had some good cash modeling in place, we were able to get through it quickly.

Phase Two was a new order of execution and operationalizing the downside planning. We completely changed our management cadences. We are meeting with our management teams every week reviewing cash forecasts. Our franchisors have changed management cadences with their franchisees. Some are having twice a week calls and some are doing daily calls.

For franchisors who haven’t started figuring out how they’re going to deal with this, it’s imperative that you get it done now. It’s like when the oxygen masks fall on the plane, get yours on to be able to then help those around you.

We’re into Phase Three now—the “respond” phase. Given the realities of what demand is available, how do we go out and defeat these downside forecasts?

We’re driving some of these same practices—understanding cash flow reserves and burn and how much runway we have—through our franchise systems so our franchisees have the ability to see what their personal roadmap looks like. We’ve got companies looking at new demand channels, new ways to interact with guests. We have have companies that are looking at new content. We have completely new programming going on around group meals, since we have some significant exposure to restaurant businesses. We’re employing new pricing and discounting strategies on a daily basis. We’re looking into things like menu optimization and new media strategies, so us and other companies are very much in the respond phase at this point.

Jamie Adams: Thanks John.

Lane, from a legal perspective, can you talk about how you see this issue impacting franchise sales, both for established concepts and emerging brands?

Lane Fisher: I see this hitting franchise sales. I think there’s been confusion around dates and whether they’ve been extended.

We’ll be able to operate as long as they have a current audit in the registration stage. If you let your registration lapse and hide all the renewals, it could have the effect of putting you out of the state for that time. It is really based on your financials and how badly they have deteriorated. It could likely require a necessary financial accommodation.

Identify someone in charge of your registrations, and continue to receive materials and file them every day even in this remote model.

I know IFA is all over this and trying to pry the FTC and states into giving definitive answers, but at the moment we are operating under the belief the dates will remain unchanged. We will need to get everyone turned around by May 1, but if any of your sales that were on the bubble come back, people are going to be devastated if they can’t close these deals.

At the end of the day our disclosure laws exist to protect the investor. It’s hard to imagine anyone will buy on 2018 information. Your new document will only have 2019 information and things have changed in 2020.

Brad Fishman: To comment on Lane’s point, I am on the phone every day with people hearing about it and the good news is some deals are getting done.

No one knows how long this will last for. We still have to prepare for the other side. Make sure you have the funding, real estate lined up, or competitors will beat you to the punch. As I tell everybody, there is going to be phenomenal opportunity for lead and franchise development. It will be like the gold rush where everyone is standing at the starting line. The question is you have to know where you’re going, what you’re going to do. There will be a lot of people out of jobs and the franchising opportunity will be there.

With every opportunity comes a great chance to take a small or medium system and make it huge because concepts are really going to make it. The way we’re addressing this is adjusting our messaging by the current status of the franchise system. How is the brand responding to the crisis? Are they communicating changes in products and hours? How is the messaging around how dedicated the franchisors are to supporting the franchisees?

There are lots of concepts that will still be open and there are some creative ideas around keeping brands open as well. Cycle Bar is renting out bikes to people so they don’t lose memberships. You’re going to have feel-good stories of franchises supporting local communities, which is great for brand development. Make sure you know what you are doing in terms of content. Everyone is home right now digesting content, online stories, blogging, etc.

Jamie Adams: We’re seeing similar things at Scorpion with our clients, on a national and franchisee level.

Messaging we never would have tried a couple weeks ago that we are now seeing success with. The marketplace is a lot emptier and quieter, so brands have an opportunity to stand out more and at a much lower cost.

For a lot of the service based brands that are considered essential, we’re seeing opportunity to continue to drive inbound leads at a much cheaper cost than just a week or two ago. In some cases, we’re seeing up to 50% decreases on platforms like Google, Bing, and even social media, such as Facebook.

If you have the means and can power through this scenario from the marketing and advertising perspective, definitely consider doubling down in your efforts.

Changing subjects, Sam, can you talk about how you are handling landlord relations and rent? And how you’re advising franchisees to handle any bank loans due at the first of the month?

Sam Ballas: We put out a strategy for the franchisees 4 or 5 days ago, and basically what you need to do for them is swing for the fences. We provided a template and they put in their ownership information, their lease information, and property management company. It’s a form letter that says for the next 90 days we need free rent and for the duration of the year, 50% rent abatement or deferral.

We’re 65% though our franchise system as far as having landlords comply with some sort of reaction. Swinging for the fence has not been 100% successful, but we have had 100% landlord participation to some degree. We want to see a 100% deferral of the base rent in the next 90 days and then 50% for the remainder of 2020.

The franchisees have a breakeven model that we created last week, going to take out and curbside only. Our franchisees get an update every 2 days on the performance of their location to see if they are green or red on the model for that two day run. We are using that data to inform the landlords. We send out to the landlord a form letter from the brand disclosing what we have done in terms of royalty abatement and national marketing fund changes, giving them no out to say “You’re a franchisee, your franchisor has all the money in the world, what are they doing with their money?”

John Teza: Sam nailed it. His organization is very data driven so it is not difficult for them to pull that off.

A lot of franchisors might be struggling with that. Going to your landlord and your lender and saying you need some assistance is critical and non-negotiable at this point. Having that unit-level short-term cash forecast is a critical component to that. They have to be able to articulate to the landlord what is going on with their business.

If you do one thing as a franchisor for your franchisee, it’s to help them put a cash model in place so they can articulate to their partners exactly what is happening.

Gary Robins: I am holding off on contacting my landlords because I don’t fully know the extent of the problem right now.

7 or 8 days ago, I was going to reach out to my landlords in a positive and constructive fashion, and say, “Hey, we have this situation, let’s talk about it.” Three days later, the letter would have been, “Hey, we’re not paying rent”. And today, the letter might be “We’re not paying rent for two months”. It’s a little bit too fluid to reach out to the landlord in a constructive way.

Even if we open in May or April, I don’t think the ramp up will be right away. I don’t think I can reach out to them with a solution. It’s a question a lot of franchisees have been asking me, but I think it’s a personal choice, whether they want to reach out to their landlords or not.

Circling back to what Sam said, this is a time for bold leadership to keep our unit energy moving forward. We’re dealing with all the managerial and tactical things that go along with shutting down, but I’m looking to the franchisors to keep their energy and do the same thing. If you’re a nervous captain, it’s going to be a nervous crew going forward.

The franchisees are standing on the corner of an intersection and we’re looking at both directions, wondering if we should cross the street. Leadership is really important, start working on our plans to re-engage the business. Our first priority is to get our employees back, then get our guests back, and then dealing with the landlord, the banks, the vendors.

Jamie Adams: Thanks Gary. There was one question that came in from a registrant and we know you’ve got experience in this.

What advice do you have for franchisees who are hesitant to lay off workers for fear of losing good people but are concerned for their cash flow, what should be considered in the decision?

Gary Robins: In this case I’ll speak from experience, not from my opinion, what we’re doing. You have to be brilliant at basic stuff. We’re engaging with them while furloughed over Facebook. If you’re not engaging with them, someone else will. I’m not saying it’s too late to start, but engaging with them is a basic necessity.

Cash budgets are critical to making objective decisions to what you can and can’t do for your people to remove that fear and uncertainty. Leadership, planning. What’s the plan to get them back, what does that look like? Going through the process would remove some of that uncertainty.

This is where culture comes into play, the culture of your organization as to whether you have been engaging with your people. Our organizations practice optimism and gratitude all the time. If you come to them with problems all the time, they see you as the problem. So, our culture is going to give us a lot of foundation to get our great people back. We’re executing on the basics to make those decisions, engaging with them, and having a plan for getting them back ASAP.

Jamie Adams: Charlie, you mentioned the scale for Service Brands, and you’ve dealt with similar scenarios.

What advice would you have as a CEO on how to have these tough conversations around employment?

Charlie Chase: Over-communicating by a factor of 10. We’re not furloughing people because we don’t like them, we’re furloughing them because we’re utilizing a bank that is out of our control but we know works—unemployment.

We are keeping their healthcare, we’re committing to who they are and what they are, but we are very transparent. I’ve been a franchisee, so I’m speaking from Gary’s concept here. It’s a bank source for us for our people. We’ve looked at this as scaling down, not shutting down. So, there’s three phases: scaling down, then you have sheltering in place, and then scaling up and coming out of the water quickly. You need cash to do all of this and you really need cash to restart, and people constantly underestimate how much cash they need to restart their business.

February 27, we had to have conversations around whether we would cancel big franchise events. March 1 we started cancelling events. So we’ve had task forces running, just like Sam has. We have 7 concurrent tasks forces running - how to have a webinar, what is the customer-, staff-, and franchisee-facing communication. We have all these task forces and everything that we’re doing is about context.

Who plans for this? Nobody. You avail yourself for unemployment insurance, it’s a very good onramp for them to get money.

There’s three words I have written all over my house and those three words are imperative: agility, accuracy, transparency.

Everything is evolving, so agility is important. Number two, accuracy and good data. Gary is a good example and so is Sam, you have things digitally and so data is accessible, you can react quickly, you know what you have to do. The last thing is transparency, you don’t keep anyone in the dark. Gary’s people cut my hair, they do a nice job, and I would hate for the people that cut my hair to not know that they were coming back to work as soon as Gary can put them in the store. They need to know that, but Gary needs the money to restart his business because his business is dead in the water when it is shut down.

As a franchisor, we have to see the context from every level. Somewhere in the middle the cash has to work.

Jamie Adams: Thanks Charlie. Brad, do you have anything to add?

Brad Fishman: Everybody has talked about communication. You want your franchisor to beat expectations. We’re talking about how long this will last. Two weeks, three weeks, whatever the number is going to be, we’re going to have to relaunch and get everybody open. Haircuts, if nothing opens for three or four weeks, people need to get their haircut. Half your people right now are dealing with crisis mode, but the next thing you need to think about is when you’re opening, how you’re going to get them up.

Charlie’s great advice is to scale down, and then most importantly how are you going to scale up fast. Everybody is going to be waiting there.

Have your people be prepared because customers are what’s going to make this work for everything. We’re talking about checks coming in May. It’s going to be a pent up demand. How do we get those people signed up for products and services they really want? The franchises who are ready to launch, scale up, are the franchises that are going to succeed in this game.

Jamie Adams: Thanks Brad. In wrapping up, what would be your final piece of advice to the franchise community?

I’ll start with Scorpion. The one thing getting Scorpion employees through is mindset and culture. Everything rises and falls on leadership during a crisis. We’re overcommunicating, having daily meetings, trying to drive this attitude of controlling what we can control and being others focused, trying to help out where we can.

Sam Ballas: Honest, clear, daily communication to your franchisees centered around your cash flow modeling of your benchmarks and KPIs that you’ve created the last few days. They have to hear from the franchisors every day. The franchisees need to know and have faith that we are there working as hard as we can behind the scenes for their best interest.

Charlie Chase: Remember context. If you can’t move into someone else's shoes in a crisis, you can’t lead.

John Teza: We know this is going to end. We don’t know when it’s going to end. You’re starting to maybe see the beginning of the flattening of the curve. For you, for your franchisees, if we can survive through this, we will come out of the other end very strong. We know there’s going to be supply restraint. Taking this time to become a stronger brand is really important. We’re starting to talk about it internally, like going into chrysalis. Some brands are completely shut down with zero revenue, some have seen a boom in their business. Regardless of what side of the spectrum you fall on, it’s an opportunity to evolve your brand quickly during this period. Yes, it’s tough there is pain everywhere. But this is also a great opportunity to grow as an organization, so look for those opportunities..

Lane Fisher: There’s been great advice on the call and this is a world where business advice prevails over legal advice every time. I encourage people to be creative and adaptive. Don’t lose sight of who you were or what your culture is, that’s what’s going to be what brings your customers and employees back.

Everybody should go through the cash flow analysis that has been suggested. There’s a company that will emerge out of the back end. The communication advice is great. Some people are afraid they may not have all the answers, but you are the ray of hope. You need to have a vision of what the other side will look like and if you do, the crew will follow the captain. If you don’t people will start taking personal actions, there will be no uniformity and very little predictability on how folks come out.

Brad Fishman: Thank you to the IFA staff and leadership. This shows franchising is a community. We’re all in the same boat going through this together. It’s gonna get up your butt, get ready to walk or jog or run. There’s going to be a lot of opportunity out there, don’t give up! Many of us are going through this. We believe in the franchising industry. With everything else, we’re going to succeed with this like we always do.

Gary Robin: There is opportunity when we reopen. There will be pent up demand, fewer and weakened competitors, people will want to resocialize and reconnect. Challenges are, you will have a skittish public. Seniors and high risk people will be waiting it out a little longer. The government may be encouraging not working a little too much and a little too long and we will lose good people. Leadership needs to work on those plans now, and not later to get unit energy moving as soon as possible.