The global recession is putting franchisees in that classic spot between a rock and a hard place.
According to Charles Miller, a shareholder and director of San Francisco-based law firm Bartko, Zankel, Tarrant and Miller, a variety of factors are putting the squeeze on franchisees. “They have an obligation to pay royalties, franchise fees, regardless of how they’re doing,” he says, adding that those fees are typically based on sales volume. “That could put a crimp in things if business is down and expenses are going up.”
Add in the fact that many franchisors are cutting back on services, and franchisees are feeling the pinch from both sides. “It’s one of those damned-if-you-do, damned-if-you-don’t situations,” Miller says. “If you hold back on your royalties, the franchisor is obviously not making any money and is not going to provide the services.”
Recession Hits Home
Statistics reported by the Rosenberg Center Franchise 50 Index, which is produced by the University of New Hampshire’s Rosenberg International Center of Franchising and is a similar model to the S&P 500, suggest that growth amongst franchisees outstrips the economy as a whole. However, those numbers also indicate that franchising is currently suffering along with the rest of the U.S. economy.
The Rosenberg Index follows the top 50 U.S. franchisors, who in turn represent 98 percent of the market capitalization of public franchising businesses. From 2000 to 2008, it increased 59.6 percent as opposed to the S&P 500, which declined 8.2 percent. The two indexes grew far closer during the first two quarters of 2008; the Rosenberg Index dropped 12 percent, while the S&P 500 slid 12.8 percent.
“Just like everybody else, I think, franchise businesses are not immune from this happening,” Miller says. “Franchising has its challenges. I’m sure that franchisees would like a break on their royalties on the one hand, and on the other hand, that also tends to probably cut off the services.”
With all that said, however, Miller still sees a silver lining with regard to franchising in the recession. “There is a tremendous infusion of new blood available for franchisees because of laid-off executives or people who get a big severance package and want to go into business,” he says. “Also, we have our veterans coming back, which has always been a pool for franchisees, and there’s just an enormous amount of people now who find franchising attractive and have the ability and the means to get in because of their severance packages or early retirement buyouts.”
This means good news for franchisors, who have a far more eager and motivated crop from which to choose. “Now franchise companies can really cherry-pick, and really have a much better and more eager group of people who want to work.”
To Franchise or Not to Franchise?
Franchising may not be immune to the turbulence of recession, but that’s not going to stop motivated would-be franchisees from investigating the opportunity. Miller says one of the most attractive elements of franchising is that those who want to be in business by themselves are given a head start, which frees them from many of the pressures of setting up shop on their own.
From a franchise company’s perspective, he says, a successful franchisee is someone who is amenable to following orders. “Military people are perfect,” he says. “Most franchise companies will offer you a plan, and they will tell you that if you follow the plan, you’re more likely to succeed than if you don’t, so the ideal candidate is not someone who thinks they know how to do it better, (but rather) someone who puts faith in (what’s offered).”
So in today’s troubled times, what are the best bets for a would-be franchisee?
According to Miller, you’re best off looking for companies that have established a recognized trademark. Specifically, he says, fast-food restaurants are performing well these days. “They usually offer a value,” he says. “People tend to think of the fast-food chains as lower-priced.”
Entrepreneur Magazine’s list of top 10 franchises for 2009 backs up Miller’s assertion. The number-one franchise is Safeway, followed by McDonald’s. There are several other fast-food chains on the list as well. The rest is as follows:
3. Liberty Tax Service
4. Sonic Drive-In Restaurants
5. InterContinental Hotels Group
6. Ace Hardware Corp.
7. Pizza Hut
8. UPS Store, Mail Boxes, Etc.
9. Circle K
10. Papa John’s Int’l, Inc.
As for the future, Miller is holding off on making any predictions. “It’s really where the economy’s heading, and I am not an economist,” he says. “I have no way (to predict that).”
However, it can be assumed that as job losses grow, franchise companies will continue to have an eager crop of would-be entrepreneurs seeking to emulate successful business models. Time will tell their own success.