Alf's Articles

Boomer Growth Means Boom Times For Franchising

by Alf Nucifora

By now, franchising is no longer the new and untested kid on the block. With more than 800,000 individual franchise operations in existence in the U.S as of 2001, franchising generates 18 million jobs and a total of $1.5 trillion in total economic output, representing approximately 10% of the U.S. private-sector economy. The heavy franchising action is in the top ten industries…fast food, retail, services, automotive, restaurants, maintenance, building and construction, food retail, business services and lodging. The better news for aspiring franchisees is that the concept has now gained credibility and respectability with the audience that counts the most (other than the customer)… private equity firms, lenders, and to a lesser extent, the public policy sector.

Where is it headed?

The trend data reveals a shifting demographic portrait of today's franchisees. They're better capitalized, many with advanced degrees, possessing more relevant experience and representing greater diversity, e.g., women, retirees, younger investors.

From an investor viewpoint, private equity players now seem more willing to commit investment capital to franchise operations because of the clarity and simplicity of the franchise method of doing business, and the somewhat predictability of income streams.

As one would expect, franchising is headed in the same direction as the marketplace, delivering products and services that meet the demographic shift and growing consumer need. With the U.S. aging rapidly, Boomer needs associated with healthcare (fitness, weight loss, and body rejuvenation), and senior care (assisted living, in-home services) are but a few examples of from where many of the future franchising dollars will be generated. There is also a growing move toward franchises that deliver products and services attractive to consumers when the economy is tight, money is expensive, or the economic outlook is unpredictable, particularly with respect to the stock market and interest rates. As consumers drive their cars and remain in their homes longer, expect to see growth in repair and maintenance services catering to the auto, home or household appliance markets.

Franchising is also mirroring the general consumer demand for increased specialization in product and service offerings. As an example, niche businesses such as dog grooming and dog day care will take over where the general pet store left off. The restaurant sector, especially the Quality Service Restaurant (QSR) category is already responding to consumer demand for specialized offerings by way of greater menu variety and choice, more ethnic concepts and menu items and a growing interest in providing nutritional foods that satisfy a healthy lifestyle.

What does it take?

According to Matthew Shay, President of the International Franchise Association (IFA), the world's oldest and largest organization representing franchised small businesses, franchise success is never a guarantee. Notes Shay, "It all depends upon the passion and commitment of the individual". Shay profiles the successful franchisee as an individual or couple with a strong work ethic, passionate about the business and the opportunity, comfortable with the communal aspects of following a formula and co-existing in harmony with a franchise community, and willing to be engaged full-time on the business. For the loner or go-it-alone entrepreneur, life can be frustrating and success elusive under the franchise tent.

Financially, most franchises operating outside the home will demand an initial investment in the range of $50,000 to $500,000, with working capital comprising a third of that amount. Most lending nowadays comes from traditional sources such as banks, SBA and private investors, as well as from franchisor companies themselves in more established franchising sectors and situations.

Where do you start?

Shay recommends a rigorous process of due diligence for the prospective franchisee. The process follows a necessary and proven formula:

• First sit down with an accountant, attorney or experienced business advisor and map out a business plan.

• Review reputable sources of information such as the Federal Trade Commission (http://www.Federal Trade Commission.htm) and the U.S. Small Business Administration (http://www.U.S. Small Business Administration).

• Read publications that provide critical advice and information about the franchise business. The IFA provides an extensive library of information on its web site (http://www.franchise.org).

• Talk to other franchisees, those who succeeded and failed, the happy and the discontented. Probe their motives, experiences, performance and resulting state of mind.

• Attend franchising trade shows and conferences. Shop the floor. See what's new and hot. Ask tough questions.

To be successful in the franchising business demands a no-nonsense, disciplined approach to the opportunity at hand. To that point, be willing to do the homework. Warns Shay, "You can never do enough research". Be willing to talk to as many franchisees as possible. That's where you'll get the most honest feedback, hear the true story, and be exposed to the realities of life in the franchise world. And be brutal when it comes to self analysis. Remember, franchising is not for everyone. For the undisciplined, the too-entrepreneurial, and those seeking the ease of laid back retirement lifestyle, franchising is not for you. For the rest, glory and riches may lie ahead.