Becoming a franchisee is often seen as a good first business for an entrepreneur. How does a recession change the equation?
Story from the Wall Street Journal
If you’re a middle manager who suddenly gets laid off, what do you do?Franchisers contend that franchises are a natural alternative. They argue that their time-tested, how-to business model offers people a greater likelihood of success than striking out on their own—assuming that the franchisee is willing to play by the company’s rules.
But does a recession change those odds? And are there special challenges and considerations in becoming a franchisee during an economic slump?
The Wall Street Journal spoke with franchising consultant Britt Schroeter about those concerns. For the past eight years, Ms. Schroeter has operated Baltimore-based Dream Maker & Associates LLC, one of several dozen independent contractors for FranChoice Inc., an Eden Prairie, Minn., firm that tries to match franchisees with appropriate franchise opportunities.
Ms. Schroeter’s background includes executive stints at several franchises, such as Kiddie Academy International Inc., Decorating Den Systems Inc. and Sylvan Learning Systems Inc. Her husband is a franchisee for a chain that cleans, repairs and replaces laundry-dryer vents, so Ms. Schroeter is familiar with that side of the franchising equation as well.
Here are excerpts from the interview:
Greater Security
THE WALL STREET JOURNAL: What are the risks of becoming a first-time franchisee in what could be a prolonged recession?
MS. SCHROETER: The risk of becoming a franchisee in any economic cycle is failure. The trick is to pick the right franchise regardless of the cycle we’re in. Understand returns in up and down cycles. For the first-time businessperson, franchising offers more security since he or she is operating under a proven formula that removes considerable uncertainty.
In today’s economy, because a franchiser offers a track record, you’re able to make better, smarter decisions by going with a franchiser than becoming an independent businessperson. To me, franchising is entrepreneurship with training wheels.
WSJ: What advantages, if any, are there in becoming a franchisee now?
MS. SCHROETER: There’s been a thinning of the forest. Competitors who are undercapitalized may be going away. People with good credit are getting excellent interest rates now on loans. Cash is starting to flow at a brisker pace. The Small Business Administration will now guarantee up to 90% of each loan—it previously had guaranteed 75%—and the Treasury Department is purchasing more securities to open up the secondary market for SBA loans. I’m already seeing a positive impact from that.
And if you need space for your franchised business, it’s a buyer’s market. Landlords are more likely to cover build-out costs upfront and amortize them over the life of a lease. That wasn’t being done 18 months ago. Also, staffing talent is widely available—and a proven business opportunity and familiar brand names should help attract it.
WSJ: Is everybody potentially a franchisee?
MS. SCHROETER: No. If I bring a candidate that doesn’t fit the franchiser’s profile of a franchisee, it does the franchiser no good, my candidate no good—and it hurts my reputation. So if a candidate doesn’t seem appropriate—if they lack the basic skills such as a work ethic and communications skills needed for overall success with a franchise—I will encourage them to focus on traditional employment.
Proven Brands
WSJ: What are your guidelines for picking the right franchise? Do they differ from what you’d suggest in better times?
MS. SCHROETER: I tell my candidates to go with a franchiser with a well-tested business and a good success rate. Look for those with thorough training and start-up assistance. Proven marketing also is critical in times like these. Also, look for strong brands. In recessions, Americans are more likely to turn to well-known names.
Don’t discount service businesses—such as senior and child care or consultants who help firms reduce overhead—just because they aren’t sexy. They are among some of the best values now, partly due to their low cost of entry, high demand and good margins.
As for general guidelines, I advise my candidates to always shop within their means. People assume that it takes a lot of money to make a lot. Not true.
There are franchising opportunities with low investments that have some of the strongest [returns on investment] around. The emergency-restoration industry [that services flood, fire and other catastrophe victims] is one. Commercial cleaning also can be a very low-ticket business.
Look for franchises that offer in-house financing or have strong third-party financing relationships with banks or other lenders. It’s a sign of their confidence in success.
Be open to products or services that aren’t sensitive to location, such as business-to-business, mobile operations or in-home services. That can lower your investment and your overhead.
Finally, consider options where you can keep your job and start a franchised business on the side. That way you have the security of your job and can move into your new business full time when it’s financially viable.
WSJ: Fast-growing franchises get lots of attention and may seem especially attractive in difficult times. But is it safer to go with a tried-and-true, if perhaps less exciting, concept?
MS. SCHROETER: I’ve always taken “fast growth” with a grain of salt. You need to make sure you select the franchise based on reality, not hype. Climbing on board a fast-moving train is great, as long as the track is solid. Rapid growth can be a sign of a healthy system—most of the time.
But because a lot of others are getting into a franchise doesn’t mean you need to be any less careful. Do full diligence. Do your homework. Think for yourself.
Inside Advice
WSJ: Should would-be franchisees speak with current franchisees to learn how well they’re really doing?
MS. SCHROETER: Yes, absolutely. You need to validate the business. Call or contact at least a dozen [franchisees]. Ask how the current economy has impacted them—and their competitors. Find out how their same-unit or territory sales were in ’08 versus ’07? How were they in the [first] quarter of this year compared to a year ago?
The beauty of a franchise is that there’s a track record. You should put together cash-flow projections and have them reviewed by random franchisees until you’re confident you understand the range and the averages of the franchised system.
Then, and only then, do you know how much cash you’ll need. Turn to the experts—the individuals who already own the business. They will help you if you know how to ask.
WSJ: Are you seeing increased pressure by franchisers and their agents to sign up new franchisees these days?
MS. SCHROETER: I don’t see any added pressure. There’s not a shortage of good candidates on the market right now. I’m getting lots and lots of calls. …Strong franchisers survive off royalties, not franchise sales. So they pay me to bring them someone who will make them a lot of money over five, 10, 20 years.
