The Right Economy for Franchising

The Right Economy for Franchising

Franchising is a larger part of the U.S. economy than most people realize. For example, according to independent research firm FRANdata:

  • 1 in 7 U.S. businesses is a franchise;
  • an estimated 3,383 franchise brands operate in the U.S.;
  • an average of 300 new brands open each year, nearly 1 every day; and
  •  744,437 franchise establishments are expected to be operational by end-2017

Each year the International Franchise Association commissions a study from PwC (PricewaterhouseCoopers) on the economic impact of franchising in the U.S. Highlights from that study include the following:

  • Taking into account the indirect impact of franchised businesses, business format franchises support more than 13.2 million jobs, $1.6 trillion in economic output for the U.S. economy, and 5.8 percent of the country’s GDP.
  • Franchise businesses provided more jobs in 2016 than wholesale trade, transportation and warehousing, nondurable goods manufacturing, and information (including software and print publishing, motion pictures and videos, radio and television broadcasting, and telecommunications carriers and resellers).
  • Quick service restaurants (QSR) is the largest category, representing 25 percent of all franchise establishments and 45.5 percent of all franchise jobs.
  • Jobs supported because of franchise businesses were at least 10 percent of the private sector nonfarm workforce in 33 states, and at least 6 percent in every state.
  • The number of people employed by franchises is greatest in California, Texas, Florida, Illinois, and Ohio.
  • Franchisees own and operate 88 percent of all business format franchise establishments and franchisors own and operate 12 percent.

In the previous article in this guide we listed several reasons this is a good time to get into franchising. Here we expand on those reasons.

Control your destiny. With the job market tight, many of today's job seekers have shifted their focus from working for someone else to starting their own business and taking charge of their financial security. This is one of the strongest reasons entrepreneurs choose franchising to support their own American Dream.

Lower cost of entry. In an effort to keep growing in a shrinking economy, franchisors have begun offering scaled-down versions of their concepts. Smaller footprints mean lower real estate costs and new options where franchisees can locate. Franchisors are also continuing to offer lower franchise fees, reduced or deferred royalties to start, and part-time versions of their original concept.

Real estate. As big box anchor stores vanish from malls across the country, new opportunities are opening up for innovative brands. In addition, landlords seeking to fill empty space are offering better rates, as well as help with build-out, tenant improvements, and choice locations.

Proven business model. In a slow-growth economy with consumer spending stagnant, minor mistakes can sink a business more easily and quickly than in boom times. Franchisors offer franchisees a time-tested recipe for success:

  1.  a proven operating system (no need to reinvent the wheel);
  2.  brand name recognition to bring in customers;
  3.  a quicker return on investment, as well as reduced risk;
  4.  marketing support (pre-opening, grand opening, materials and collateral, and ongoing national and regional campaigns);
  5.  initial and ongoing support from both corporate staff and fellow franchisees; and
  6.  training, not only in running the business but also in managing and expanding it and developing an exit strategy.

Financing assistance. After severe cutbacks at traditional franchise lenders following the Great Recession, lenders have figured out new ways to assess risk and are making more loans. Alternative lenders have sprung up, many of which work closely with franchise brands to make funds more easily available for new franchisees — based on their analysis of a brand’s strengths, as well as the borrower’s. Having a successful franchise brand behind you when you approach a lender greatly improves your chances of success in financing your dream. And an increasing number of franchisors are stepping up with loan guarantees, financing, and establishing relationships with both alternative and traditional lenders to free up capital for equipment, real estate, and additional units.

Something for everyone. Franchising is a business model, not an industry. That means it can be applied to any industry or business sector. And within each sector, there usually are several competing brands to choose from. Do you like dogs? Fixing leaky pipes? Caring for seniors? Hosting hundreds or thousands of hungry customers every day? No worry: in franchising, there's a concept, niche, or sector for everybody. It's just a matter of finding yours.

Even with all these good reasons to consider franchising, the usual "buyer beware" warnings still apply. While success ultimately depends on your passion, dedication, and hard work, you still must choose the right industry, franchisor/brand, territory, and hire and manage the right people — another reason to remember that, in franchising, "Making it on your own doesn't mean making it by yourself."

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15.3: Beginning The Franchise Journey

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