Fazoli's Tries Some Development Incentives

By Jonathan Maze, September 19, 2012

Fazoli's has a new menu, new prototype, and a long string of sales growth. Now it just needs the franchisees. The Kentucky-based chain of Italian fast-casual restaurants is planning to use a series of royalty and fee waivers for new operators in an effort to kick-start development.

Fazoli's plan, according to the company's vice president of franchise development, Craig Sherwood, provides up to $120,000 in incentives for new franchisees, depending on the number of units they open.

An operator who opens one unit could get roughly $30,000 in incentives. The company would waive the first $20,000 in royalty payments, which Sherwood said covers about the unit's first six months. The operator would also get $10,000 off its franchise fee. The second unit would earn another $40,000 in incentives, including the royalty waiver and $20,000 off the franchise fee—for a total of $70,000. The incentive for the third unit is $50,000, including a fully waived $30,000 franchise fee, or $120,000 total for three locations.

"We're just trying to get the pipeline moving," Sherwood said. "We've had a tremendous amount of success, including 26 consecutive months of same-store sales growth. We're ready to grow again."

The incentives are targeted at new franchisees. The company is planning a different set of incentives for existing operators. The company has 217 locations, including 127 company-owned stores.

Development incentives have become more common in the post-recession franchise business, as chains look to spur growth either with new or existing franchisees. The limited pool of able or willing franchise buyers, due largely to restrictions on credit, have forced franchise systems to take more aggressive steps to encourage development. That many of these steps have involved royalty waivers demonstrates how dramatically the recession has changed the franchise business—not long ago, such fee waivers were almost unheard of.

Still, Sherwood believes that the credit markets are warming up for chains such as Fazoli's, a chain many lenders would shy away from after the credit freeze, but which can now boast more than two years of consistent sales growth, plus a series of aggressive efforts to overhaul the brand. Those efforts include a new, smaller prototype that should make the unit economics more workable. "My hope is that, with the success we've had with the brand, lending institutions will find it easier to sign lending agreements with us," Sherwood said. "Things have loosened up."