October 4, 2012

Growth of franchises outpaces other business

After about 30 years, Bonnie Fehr wasn’t happy with the way things were going at her company.

After about 30 years, Bonnie Fehr wasn’t happy with the way things were going at her company.

So two years ago she and her husband, Ron, agreed to start a business. But Bonnie Fehr was 51 at the time and worried about losing their savings.

That’s why they decided to try a franchise, and after shopping around through a business broker, they bought a franchise of PostNet, a shipping and copy shop at 13303 W. Maple.

“Mostly because we hadn’t done this before, it gave us a confidence level,” she said.

It was a tough first year, she said, with the sizable upfront investment on top of the loss of her income. But business has now improved to the point where she can afford the help that allows her to get out and market the business properly.

“We’re almost there,” she said.

Even in the slow economy, franchise growth continues to outpace business generally, said the International Franchise Association.

The number of franchise establishments in the U.S. is projected to rise by 1.5 percent this year, to 736,114 total establishments, the first the number will rise since 2008. Direct employment in franchise establishments will increase by 2.1 percent to 8.1 million, according to the association.

“The main reason we are not growing as quickly as we did in the last decade is that access to capital has kind of stalled a lot of new franchisees,” said Alisa Harrison, spokeswoman for the association. “Bankers are asking for more money and more collateral. And a lot of franchisees in the past had used their homes or 401(k)s and the value of those has fallen.”

Who are the franchisees

Fehr’s experience sounds typical, said Alison Mairet, who counsels prospective franchisees for FranNet.

She said 48 is the average age for the people who come to see her. And they typically have never owned a business before.

“Some have been moved around or been downsized and have lost control over their work lives and they don’t like it,” she said. “Many have raised their kids and are ready for a change. And some are just sick and tired of their jobs.”

They often have the advantage of having accumulated enough wealth to afford the initial investments and a working spouse to support them during the first year or two of startup.

Mairet said the keys she looks for is whether the prospective franchisee has the ability to follow the system laid down by the franchisor, and whether she can plan ahead and work toward a goal. Ex-military members often make excellent franchisees, she said.

Mairet, based in the Kansas City area, helps prospective franchisees at no cost. The cost is borne by the franchisor, if the person is taken on.

Different kind of business

A franchise is quite different from a typical business.

The upsides are many, but so are the downsides, said Sam Moyers, an adjunct professor at Wichita State University and former Rent-a-Center franchisee who will teach a seminar on franchising on Oct. 18.

The upside is that the franchisor has already done the experimentation and developed a system so that the brand, products, suppliers, operating procedures, technology, marketing and advertising are already known to work on Day 1. That takes a huge amount of risk out of the running of a business.

The franchisor also evaluates potential franchisees closely to make sure they have adequate capital and experience. Then they train the franchisee on how to run the business, provide them bulk purchasing and offer ongoing advice. It’s like having a business consultant on retainer, said Moyers.

“A very high percentage of businesses started from scratch fail,” Moyers said. “Depending on whose statistics you use, it’s 50 percent within 5 years, or as high as 75 percent. If you start a franchise business you have a much greater chance of success.”

But the support comes at a cost, he said.

Franchisees have limited ability to tinker with the business. They really just have to execute the franchisor’s system.

“A person who likes to be experimental or creative won’t have the freedom they want,” Moyers said.

Franchisees are called “happy prisoners,” Moyers said. They are typically locked in for 10 years, and if they want to sell, must offer the franchise first to the franchisor.

And it’s expensive. Depending on the business, the upfront fee ranges from $25,000 to $1 million, and the ongoing fee is between 1 and 11 percent of revenue.

“Sometime they make as much or more than you do, without the risk,” Moyers said.

The payoff

Mollie Schell has been a franchisee of Kid to Kid, a children’s consignment shop, for 10 years.

She had worked as a pension administrator, but went through three buyouts, so she decided to search for something that gave her more control.

Through a business broker, she discovered that a previous franchisee wanted to sell the Kid to Kid franchise 2243 N. Tyler Road.

“I didn’t know what I was doing,” she said. “They teach the system and controls and doing the business right.”

The franchisor, Base Camp Franchising, has pushed her to grow more than she ordinarily would, and has given her tools that she could never have afforded, she said.

“It would have been a much more rocky road,” she said. “There was point in time, with Kid to Kid, that it was taking a long time to turn around. At the end of the first year, I was wondering if we were going to make it. They said, ‘Stick to the system, and you will be fine’ – and I was.”

Enough so that when Base Camp created Uptown Cheapskate, a consignment for teens and young adults, in 2009, Schell chose to franchise again.

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