Alf's Articles

Slump Sparks New Interest In Franchising

by Alf Nucifora

There is no experience to match walking the floor at a franchising trade show. The corridors reek of entrepreneurialism on the make. Franchisors pitch their wares with the fervor of evangelists. Prospects listen in rapt attention, visions of wealth shimmering before their eyes. It's good old American capitalism in its purest, most basic form... prepackaged enterprise to go, the same way we like our meals.

I recently prowled the floor at the 11th Annual International Franchise Expo in New Orleans. More than 250 franchise companies were on the floor touting their concepts... lots of food franchises, particularly pizza, ice cream and coffee... a plethora of personal services offerings from tanning salons to weight loss programs... home services galore including cleaning, glass repair, leak detection and drain cleaning... small business catered to with portable storage pods and every flavor of Internet and Web service imaginable... and the unusual... kiosks peddling low-cost replacement inkjet cartridges, in-home dog training, turn-key, pre-school academies, not to mention a concept that allows the customer to outfit a stuffed bear from hundreds of wardrobe choices and with a personally-recorded sound chip. Seminars were packed with those eager to absorb the successes, failures and experiences of those who had previously trod the franchising pathway. Lots of franchising how to... how to select, buy, sell, negotiate, finance, etc.

According to International Franchising Association (IFA) President, Don DeBolt, economic downturns traditionally result in renewed interest in franchising. The growing unemployment rate (particularly among middle-management ranks), driven by an increasing wave of corporate lay-offs, inevitably attracts the corporate dispossessed and the wannabe entrepreneurs, in addition to those seeking the solace of self-employment within the confines of a proven game plan and a defined business space.

The Reality of Franchising

In spite of its somewhat checkered history, franchising has revealed itself to be a proven concept with a resilience that has survived the test of time. The IFA estimates that there are now 1500 franchise companies operating in the U.S. doing business through 316,000 retail units. Recent industry surveys provide a clearer profile and understanding of how the typical franchise operates today. The majority of franchises (75%) reported an initial investment level below $250,000 not including real estate. Seventy percent (70%) charge an initial franchise fee of $30,000 or less. About one-third offer financing. Eighty two percent (82%) set royalties as a percentage of sales, normally in the range of 3-6 percent. Seventy two percent (72%) charge an advertising/promotion fee, traditionally a percentage of gross sales and commonly set at 3%. Two-thirds of reporting franchises have been in business 12 years or more with retail food franchises enduring the longest with an average of 30 or more years under their belt.

Yet it's the psychology of industry and the changing temperament of American business that auger well for franchising's continued viability and success. As America embraces and accepts the SOHO (small office/home office) environment, franchising provides an ideal point-of-entry for the budding small business entrepreneur... a projectable income stream from a proven business concept, accompanied by an operating history and support structure that relieve the stress of the unknown and uncharted. The franchisee provides what he/she does best... some capital, heavy commitment to the business, a passion for reward and success and lots of hard work. On the negative side, franchising can approximate a minefield for those who don't do their homework. At worst, outright failure can lie in the wings. Or as is more often the case, the franchisee wakes up one day to the realization that it's the same salary grind with no one else to write the paycheck. Disillusionment raises its head to ask, "Is this how its supposed to be? Is this as good as it gets?"

Bottom line, smart franchise prospects do their homework then tie their selections and their futures to a partnership based on best available knowledge and proper due diligence.

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