Franchise Lawyer Blog

I attended an IFA Franchise Business Network meeting this morning, attended by various franchise professionals, franchisees, franchisors and regulators. We heard from franchise consulting companies, including brokers and matching companies, brand developers and new and established franchisors. The topic was the business forecast for 2010 and the primary speaker was Edith Wiseman of FRANdata.
The consensus presented is that the economy is in a technical recovery that is much slower to reveal itself in real terms. What that means is that the stock market and technical data such as corporate profits and GDP numbers are showing improvement, but those improvements are not being felt at the consumer/employment level. The employment numbers, which we have seen in a number of places, are sobering: when the unemployed are added to the "underemployed" (people who have taken lesser jobs just to work) and people who have stopped looking, the actual figure is 17% of Americans are affected. A recent Wall Street Journal article recently counted in the millions the number of "long term unemployed," people who have been out of work for over a year. The unemployment numbers are a huge drag on any calculation of consumer spending and consumer sentiment.
Lending has also suffered a negative effect whose roots are now deep and will take some time to recover from. Franchisors in attendance who once had "preferred lender" programs now say those relationships have disappeared. Franchisors are trying to create new relationships from scratch with local and regional banks. The SBA lending limit is being reduced from 90% to 75% and some banks are responding by saying they will not participate in SBA transactions any longer. All of these developments make it more difficult for potential franchisees to finance new businesses.
Ms. Wiseman's prognostications included a 2 to 4 year window of choppy economic developments, such that even if the overall trend may be positive, considerable setbacks will be felt along the way. She indicated that recent numbers show that franchising as a business model continues to show resilience in this economy, with a net increase in total units within 2009.
When those in attendance were asked how this recesssion is affecting their approach to business development, the mantra of "performance matters" was repeated. Transactions will not be entered into unless potential financial performance can be measured in real terms. In the development context, this means carefully scrutinizing potential franchisees and their financial capability if you are a franchisor, with a preference for multi-unit development deals. If you are a franchisee or someone consulting them, there is a higher demand for financial performance figures (it was reported that FDD's containing Item 19 financial performance representations increased from 18% to 35% in the last year). Potential franchisees are also looking for incentives and discounts, which some franchisors are now willing to consider.
All told, the mood in the room was sober, but not somber. People were optimistically looking for the light at the end of the tunnel and planning acordingly.

Any person with an entrepreneurial mindset must consider countless options when deciding whether or not to start a new business. One fundamental decision that must be made at the threshold is whether to create a business from the ground up solely in the entrepreneur's vision, or invest in a developed concept that has been franchised and made available for acquisition.

Some recent articles suggest that the trends are strongly towards the franchise model, a trend that has become accelerated by the recent economic downturn. One recent FoxBusiness article analyzing franchise development points out that the sense of ownership and self-control that is so essential to the success of a "Mom and Pop" store can be duplicated to a certain extent in a franchise situation. However, there is always a tradeoff involving a loss of some control. In exchange for the business plan, name recognition and trademark that the franchisor has developed, as well as training and other support resources, the franchisee gives up a substantial portion of revenue and must subject itself to the system controls imposed by the franchisor. As that article notes, quoting the president of the IFA, “Some entrepreneurs are so independent-minded they don’t want to give up control of any aspect of the business ...For those business people, fitting into the structure of the corporate business isn’t for them." However, for those business people who can sacrifice some part of their own vision to take advantage of a system, the franchise model offers enormous cost and time savings advantages.

A recent article in Kiplinger on franchise growth and lending trends, states that from 2000 to 2008 the number of franchised restaurants grew by 20%, while the number of independent restaurants contracted by 4% over the same period. The article predicts that this trend will continue, observing that franchised businesses are "typically better positioned than mom-and-pop shops to survive downturns, benefiting from a strong brand presence, corporatewide marketing campaigns and access to advice and mentoring from the franchisor. Plus they can often offer customers -- and get from suppliers -- steeper price discounts. " That article also points out that lenders are more comfortable with franchised businesses, noting "lenders have a slight bias toward franchises...generally, bankers tend to perceive franchises as less of a risk. There’s a greater willingness to lend to them...adding that loans to franchisers also tend to be larger compared with loans made to independents."

So do these trends signal the end of the maverick entrepreneur who singlehandedly changes what we eat, wear and buy? No, of course not. Economic trends, particularly the negative ones of the past year and a half, may alter the direction many start-up businesses take in getting started. Buying an established business concept may seem like the far safer bet in a damaged economy. But there will always be those who buck the trend. This country and this economy will sometimes richly reward those who think and act for themselves, and the lure of that unique brand of success will always be there.