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Franchise paradise – Business model gains ground in recession

By   /   Friday, June 5th, 2009  /   Comments Off on Franchise paradise – Business model gains ground in recession

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Chad Jordan grew tired of the corporate grind six years ago. With a craving for sandwiches and smoothies, he and two friends, as well as their wives, drafted the idea for California Fresh over lunch.

Upon founding the laid-back sandwich and smoothie deli in Santa Maria, Jordan took the leap from the ranks of the corporate world to small-business ownership.

He’s now ready to add chapters to his success story — but he doesn’t want to do it himself. In fact, Jordan hopes people who feel just like he felt six years ago will be interested in duplicating his business as he opens California Fresh up for franchising.

In a down economy, franchising is becoming more popular, with owners looking to franchise their businesses and potential entrepreneurs looking to buy franchised businesses.

“We’re seeing far more interest in franchising than we ever have,” said Geoffrey Hassan, co-owner of the Santa Barbara branch of Franchise Development & Marketing Group, which is working with California Fresh. The firm consults businesses that want to franchise, guiding them through the legal framework, business paperwork and the implementation and marketing stages.

Hassan said that most potential franchisees come from the corporate world, and it’s not surprising, especially given the thousands of layoffs occurring around the country each month.

California lost 63,700 jobs in April, for a total of 2 million unemployed, according to the California Employment Development Department. In the Tri-Counties, unemployment numbers stand at 40,400 in Ventura County, 17,400 in Santa Barbara County and 11,700 in San Luis Obispo County.

“There’s a huge pool of highly educated and highly motivated people who have been laid off and are willing to try their own thing,” Hassan said. “They often look to franchising as a way to take the road to owning their own business; they look towards a prepared business model.”

No corporate control

Vic Scimo is a California consultant with FranNet, an international franchise consulting firm that works with clients interested in purchasing franchised businesses. Scimo said that since the economy has turned sour, he’s seen a spike in the number of people who come to him interested in buying a franchise.

“They’re frustrated with corporate America,” he said.

Scimo’s typical clients are between the ages of 40 and 60 — baby boomers who have been laid off or are not ready for retirement. “It’s tough to start out again in the job market at that age, yet they realize they can’t get to retirement without generating some more income,” he said.

Hassan acknowledged that for those who’ve spent the majority of their career in the ranks of the corporate world, entrepreneurship is tough, even if it’s with a pre-established business model. “A lot of them are really making an emotional decision and a very large decision — they’re deciding to change their whole life,” he said.

A survey by the Washington-based International Franchise Association showed that there were more than 97,000 franchise establishments in California in 2005, producing over $106 billion in revenue.

According to that same survey, the 23rd Congressional district — which encompasses most of the Tri-Counties — had 4,447 franchise establishments generating more than $4.4 billion in revenue. Those franchises employed more than 50,000 people and had a collective $1.5 billion annual payroll.

Choosing a franchise

Scimo said FranNet, the consulting firm for potential franchisees, shows people if they’re “good for franchising.” The firm’s profiling service asks each client about their budget and net worth, personal interests and professional strengths.

“What we basically end up with is a kind of ‘wish list’ that helps us find the best two or three options for that client,” Scimo said.

“Recession-resistant” franchises are now proving especially popular, he said. That includes a long list of low start-up, low overhead cost businesses, from commercial cleaning services to home tutoring business.

Personal-care services, salons and pet-care services hold up well no matter the economy, Hassan said. “People don’t mind spending money on themselves and their animals.”

On the Central Coast, particularly in Santa Barbara County, Scimo sees particular potential for health-care related businesses that tap into the retirement-age demographics of the region.

Home restoration and “handyman” services are also becoming increasingly popular, as are business-to-business services including business coaching, consulting and staffing. “Small-business owners need consulting now more than ever, and if a franchisee can share some experience from the corporate world, even better,” Scimo said.

As just one example of a business-to-business franchise, FD&MG is itself a franchise, with Hassan co-owning the Santa Barbara office. Nationally, the firm hopes to sell up to 40 franchises of itself.

According to its Web site, the initial start-up fee to own one of these consulting firms is $75,000, with a total start-up investment of between $109,000 and $136,300.

As for restaurants — the most prolific franchise sector — Hassan and Scimo agree that high start-up and overhead costs are often the biggest downfall. “It’s the ‘fast-casual services,’ not the large steakhouse concepts, that usually work in the restaurant franchise business,” Hassan said.

The International Franchise Association estimates that the initial franchise fee for most franchises is between $10,000 and $30,000 and the average start-up investment, not including real estate, is between $350,000 and $400,000.

Franchisees choose to pay those large franchising fees because they’re cashing into a proven business with ongoing support.

“Anybody can make a better hamburger than McDonald’s,” Scimo said. “You’re not buying a McDonald’s franchise for the hamburger recipe. What you’re buying is a system that works around the world.”

With frozen credit markets, obtaining the loan to buy a franchise in the first place is easier said than done. Hassan said loans from the Small Business Administration have “really dried up.”

“More people are excited about owning a franchise than there are loans available,” Jordan agreed.
Scimo said a lot of people are choosing to cash into their 401(k)s and IRAs and while he agreed that lending is tight, “the SBA is still making loans,” he said.

All three agreed that a high credit score and net worth are more important than ever to qualify for a small-business loan.

Franchise expansion

Jordan’s reasons for choosing franchising rather than self-expansion of his venture are simple. “I decided to franchise California Fresh because I have three kids and have managed multiple restaurants before and know what kind of time commitment that is. It’s tough to be everywhere at once,” he said.

“I realized I could wait 10 or 15 years, until my children were grown, to expand — or I could franchise,” he continued. “We’ve got a great model, and I knew that the longer I waited, the more opportunities there would be for competitors to move in.”

Since getting California Fresh through the federal and state approval process for franchising in early May, Jordan said he’s already entertained interested franchisees from all over the state.

“A lot of our clients are really looking to grow regionally,” he said. “They’re looking for their first or second franchisees to be somewhere close in California.”

For most business owners, lack of capital is the biggest barrier to business expansion, which is why franchising becomes such a viable option. Rather than make huge capital investments themselves, franchisers are paid large up-front start-up fees and continued royalties thereafter by their franchisees.
Once a business decides to franchise itself out, however, the legal process and mandated business documentation are also significant obstacles to work though.

American businesses that want to franchise themselves out must be approved by the Federal Trade Commission, which governs franchise law. The FTC requires all potential franchisers to complete a lengthy disclosure document, often called the “FTC Rule,” detailing the franchise’s fees and basic investment requirements, financial statements, copyrights and other intellectual property, litigation and bankruptcy history and franchise agreement.

In California, the California Franchise Investment Law and the California Franchise Relations Act also require potential franchisers to register their businesses with the state and go through a similar documentation process.

After obtaining government approval, a franchise moves into the next step: developing its own documents, policies and procedures to present to franchisees, including franchise fees and royalties, advertising percentages, criteria for qualified buyers and the franchise’s operations manual and training materials.

After that, it typically begins to market itself and award franchises to qualified buyers.

Hassan said California Fresh is “a great example of a very successful business that had to make the decision of how it wanted to expand.”

“Franchising is just another way to grow — without a huge capital investment,” he said.

Jordan said that the best franchising business models are those that keep it simple. “I just have a bunch of guys making sandwiches and smoothies. It’s not complicated,” he said. “If you have a concept that anybody can do, not just people with MBAs or Ph.D.s, it can probably work as a franchise.”

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