Franchising's Slow Recovery

McDonald's and 7-Eleven are among the Goliaths of the franchising world, but that world is made up of much more than fast food chains and convenience stores. From driveway seal coating to gyms to caring for grandma, there are plenty of franchise models to choose from and they may be an attractive investment for people who find themselves pushed into the unemployment line by the recent recession.

The slow recovery could help to spur the sale of franchises, which hit a plateau during the recession after years of fast growth. After all, the idea of franchising appeals to that bit of entrepreneur in all of us; that feeling that "I could run the show." With so many disenfranchised with how their boss handled the business during the recession, some may want to take a crack at ownership using a proven business model.

Franchises can be found in 75 different industries, from gyms to restaurants to blacktop sealing. Franchising associations like to tout the numbers of the 2007 report by the U.S. Census Bureau. Those were heady days when franchising grew 40 percent from 2001 to 2008, but times have changed. Now there is a new norm. Franchises in New England that simply held their own for the past two years without losing any ground are considered successful, says Steve Dubin, president of PRWorks and president of the New England Franchising Association.

Franchise growth came to a screeching halt in 2008 and even declined by .1 percent between 2008 and 2009. A report commissioned by the International Franchise Association (IFA) Educational Fund, "Franchise Business Economic Outlook for 2011," and conducted by PricewaterhouseCoopers, forecasts franchising establishments to expand in 2011. The projected growth is modest, 2.5 percent from 2010, an increase of 19,079 new establishments creating 194,000 new jobs. Economic output by franchises-the gross value of goods and services a business produces-is projected to grow by 4.7 percent, or $33.3 billion. The largest expansion is expected in lodging, automotive, and retail products and services. Matthew Haller, president of IFA, says the three strongest franchises in 2010 were personal and commercial services, and quick-service restaurants. The quick-service restaurant industry continues to be an emerging market as people, while continuing to dine out, are watching their spending more closely.

Darrell Johnson, president and CEO of FRANdata, warns franchises, like the rest of the economy, are in for a slow recovery. "The good news is that the process has begun. But for strategic and tactical planning purposes, anticipate further economic uncertainty and competition for credit that will continue for the next three-plus years," Johnson stated at the 2010 Franchise Leadership & Development Conference in Atlanta, GA. It may be smart to listen to Johnson. At the 2007 Conference, when the economy was still humming along, he predicted a difficult year for franchising in 2008, which turned out to be the case. And in the fall of 2008, he forecasted that economic challenges would last beyond 2010, when most economists were talking about a relatively short-lived downturn.

"The economic downfall of the last two years has impacted the franchising community in New England. Potential franchise investors who could no longer afford the large franchise fee are turning to more in-home businesses that require smaller fees and no investments in buildings," says Dubin of the New England Franchising Association. He says he has seen growth in many in-home businesses, such as cleaning services and text marketing.

New Franchisees Enter Market

Udo Schlentrich, director of the Rosenberg International Center of Franchising at the University of NH Whittemore School of Business, and Dubin see a new demographic of entrepreneurs in the franchisee sector: laid-off corporate executives; retirees who are not ready to retire; families who want control of their schedules; people who had their nest-egg cut in half when the stock market dropped in 2008; recent college graduates who can't find a job; and immigrants.

"In response to economic downturn cycles and corporate restructuring, many individuals have successfully made the transition from employee to employer by acquiring a franchise," Schlentrich says.

He says NH is a state that can attract businesses and entrepreneurs because it lacks bureaucracy. Among the franchise markets he sees emerging in the coming year are health and fitness, early childhood education, and in-home personal health care. However, some franchises that provide excellent opportunities elsewhere may not make sense for the New England climate, such as pest control or pool service.

One franchise that has been able to capitalize on the cold northern climate is Black Dawg Sealcoat. Owner Jack Child started a seal-coating business in August 2005 and was selling franchises in less than a year. He has since franchised into all of New England, down to Virginia, over to the Mississippi and up to Ohio-virtually anywhere that temperatures fall below freezing and asphalt cracks. Child has not stopped there and has added Yellow Dawg Striping and Blue Dawg Power Wash. Child attributes the success of his franchise to a dedication to providing good customer service. Child experienced poor customer service and sloppy techniques when he hired someone to seal his driveway. He then researched the business and found a marketing and customer service void that "you could drive a train through."

"I didn't invent anything new. I just applied good customer service and solid business practices to the industry," Child says. When he began to franchise his business, Child wanted to offer franchises that people wouldn't have to invest their life savings to enter. It also allows him to grow his business quickly. A Black Dawg Sealcoat franchise fee is $4,975 with a total investment of $50,000 to $100,000, depending on the size of the territory.

The cost to open a franchise varies. On the low end are in-home businesses that require little up-front money, such as Green Irene, an in-home green consultant business that requires a $150 franchise fee and an annual renewal of $29.99. Planet Fitness, a successful NH-based gym franchise that plans to open 100 locations this year for a total of 500 stores, requires more investment. The franchise fee is $10,000 with a 5 percent electronic fund transfer royalty fee and a total investment of $1.2 to $1.4 million.

Buying a Franchise

David and Janet Sullivan bought a Right at Home franchise, an at-home caregiver service for elderly adults, in 2008, after experiencing the need for in-home care for an elderly parent. They say their business, based in Londonderry, doubled in the past year.

The Sullivans advise people thinking of buying a franchise to do extensive research before settling on one. They say the guidance they received from the Right at Home franchise was valuable to their own success. The franchise provided them with marketing, systems, networking with other franchise owners, advice, and training for themselves and caregivers that were invaluable tools to starting their franchise on the right foot.

To start their Right At Home franchise, the Sullivans paid a $38,500 franchise fee plus a sliding-scale royalty fee. The Right at Home Web site projects start-up costs to be anywhere from $63,000 to $99,000.

The Sullivans suggest doubling or even tripling the start-up costs on any franchise, as there can be delays in receivables, unforeseen expenses, and a need to make sure you realistically calculate for your income.

It may seem like a hefty price tag, but Vladimir Harris, principal of Chartworth, LLC, an investment banking and management consulting business in Portsmouth, sees a real beauty to the franchising model. "This is a quick entry into business," he says. It allows someone that may lack the creative spark or background in business processes to be an entrepreneur. He says franchising fees and royalties paid to a franchisor can be worth it when weighed against the costs of starting from scratch, putting systems into place and building a brand.

Franchises are easier to sell, Harris says. Part of being a business-owner is having an exit strategy, and a business with national or regional recognition is much more saleable. Harris notes that McDonald's and Ford franchises are traded all the time.

The Sullivans were fortunate that they did their own financing; the tightening of credit by banks has made it hard for people to venture into the higher-priced franchises. If you have the financing, "you are in the driver's seat," says Don Sniegowski, editor of Blue MauMau, a Web site focused on providing trade news and information for the franchisee community. Sniegowski, who recently served as a guest blogger for CNBC on the franchising industry, sees 2011 as a buyer's market for the franchisee. Although conventional loans are still tight, if you have the money, fees and agreements are up for negotiation, he says.

Sniegowski advises potential franchisees to be leery of franchise propaganda promising too much. "Join a franchisee association," he advises. "This is one of your best sources for inside information on the industry." As for which industries will prosper in 2011, Sniegowski predicts that auto sales will pick up since the average American car is now over 10 years old. He also likes the gourmet burger industry and sees a bounce back in hotel revenues.

Many franchises are reinventing themselves to fit with the current market. Before buying, experts advise conduct due diligence, hire a franchising contract attorney, join a franchisee association, interview other franchisees, and realize that franchising is not all a bed of roses. It is not a business in a box; it is not a guaranteed success. It still requires good management.

However, once you've done your homework, it can be a way to mitigate some of the risk of business ownership. "Because of brand equity and proven systems, a well run franchise stands a significantly better chance of success than a start-up. With good management, good communication and a product that inspires customer loyalty, it is possible to open the doors of your franchise and be profitable," Schlentrich says. It is what Ray Kroc, founder of McDonald's, meant when he said, "In business for yourself, not by yourself."