Franchises can be safer business investments in tough times

December 15, 2008
Franchises long have played a major role in the nation's economy. In Indiana alone, 19,600 franchised establishments employ 265,300 people and contribute $5.8 billion to the state's payroll, according to the Washington, D.C.-based International Franchise Association.

But what is the current state of franchising, given the tough economic environment? Marcus Chandler, who leads the entrepreneurial services practice at Barnes & Thornburg LLP, weighs in. He is an expert in the field and has counseled both franchisees and franchisors for more than 20 years.

IBJ: In the current economy, is now a good time or bad time to buy a franchise?

CHANDLER: It would depend primarily on the product or market you're going into. But in general, franchising is regarded as a safer and more sound way to begin a business than raw startups. The failure rate for franchises is far, far less than the failure rate of startup businesses, essentially selling the same goods and services. In difficult economic times, when you want to minimize risk, franchising is probably a good place to begin.

IBJ: What are the advantages and disadvantages of operating a franchise during a recession?

CHANDLER: One advantage is that many franchise systems offer very favorable terms for such things as leasing equipment or financing, or even subsidizing the buildout of a facility. They oftentimes have very favorable terms in providing the first set of inventory. They might also provide a great deal of assistance in marketing your franchise.

The obvious disadvantage of course is that one doesn't know where the potholes in the economy are — whether people will continue, for example, to go out for casual dining or fast food, or stay home. There's nothing inherent in franchising itself that would make it disadvantageous in these times. It's purely what market you choose to go into. Because of the difficult times, you would want to expand a little more extra effort looking into the financial condition of the franchisor.

IBJ: How are the tight credit markets affecting the ability to buy a franchise? Is there financing out there?

CHANDLER: Well, obviously, many franchisees seek traditional bank financing, and in particular, [U.S. Small Business Administration] financing. Well-established franchise systems that have a proven track record of success have financial institutions that are eager to lend to franchisees in that system. If you've found yourself dealing with a franchisor, it might be far easier than economic conditions would suggest.

IBJ: Why do most people seek out franchising opportunities?

CHANDLER: The principal reason for franchising is in two parts. One is, they have a proven system of operations. A key part of buying a franchise is the ability to study the history and performance of franchise stores. You can look at how profitable they are and contact those operators. It saves you from having to determine for yourself all of the tricks of the trade and what the keys of success are.

The second key element is a well-established trademark. Franchises that are operating on a regional or national level will spend a lot of money promoting a national trademark. You will get all of the advantages of operating under that trademark.

And many, many times in a recession such as this, or even when there's been a layoff at a manufacturer, individuals might take some of their savings and invest in a franchisor.

IBJ: Any tips you can offer those who are considering becoming a franchisee?

CHANDLER: There's two things. One is, there are national conventions that franchisors put on where, in the course of a day or two, you can visit literally several hundred franchise opportunities. You can find those typically online.

There are also brokers who represent franchises. One of the advantages of dealing with a broker is that they might be able to help you find a better fit than if you were out on your own.

The point of the tips is that you want to shop widely. Often, people get excited about one idea. Maybe they've always enjoyed baking and decided maybe baking cookies might be fun. Well, baking cookies stops being fun when you're not making any money.

IBJ: Are there any particular sectors of the franchise field that are faring better than others right now?

CHANDLER: Things are happening so fast I'd be afraid to answer that question. I just don't know.

IBJ: How are potential owners evaluated, and what is the rate of success?

CHANDLER: Franchisors are pretty rigorous about the assessment they do of potential franchisees. They'll of course start out with a full financial report and a credit check, and a background check. Beyond that, they'll want to know the extent of how committed you are or whether you're going to treat it as a hobby. They want franchisees who will be successful over the long term. There will be personal interviews and training. At any point, they might ask you to reconsider, if it doesn't look like you're going to be a success.

The success rate is usually over 66 percent. (The figure for independent businesses is roughly 35 percent.)

IBJ: Why are there so few franchisors in Indiana?

CHANDLER: Well, I don't have a great answer to this. I've been asked from time to time. We've had some successes that did start here. There was Noble Roman's and others over the years. For a long time, it seemed like so many of them came out of Nashville, for some reason or another.

IBJ: What are some of the more common mistakes that lead to failure?

CHANDLER: Far and away, the principal cause of failure is the franchisee does not make it his or her major focus of business activity but decides after some brief period of time that they can leave others to run the store or operations. And as a result, things tend to slip.

It takes a real sense of ownership, particularly in the early years. They don't run themselves. If someone has success, they might turn around and be able to set up a dozen stores in a particular area. But in the early years, there's a learning curve.

In a close second place is the failure to investigate the ability to deliver on the part of the franchisor on all of its promises. It goes back to the need to investigate what the franchisor has done with all of its existing franchisees.

IBJ: What is the most important advice you can offer?

CHANDLER: It's becoming a theme here, but I'd say investigate, investigate, investigate. What is even more important is finding a system that is well run and has a proven track record. And chances are with the large number of franchises out there, you can find something that you enjoy and can be successful at.
Source: XMLAr02101.xml

Recent Articles by Scott Olson

Comments powered by Disqus