Franchising has always been a popular entrepreneurial venture. According to the International Franchise Association (IFA), franchising companies and their franchisees accounted for $1 trillion in annual U.S. retail sales in 2000 and made up more than 40% of all U.S. retail sales. With such figures, as well as the reluctance of venture capitalists to invest in startup ventures, many aspiring entrepreneurs are wondering if now is a good time to look into the franchising industry? It depends on your personality.
The food industry represents most of the franchise activity, representing some 25% of sales, according to the IFA. But within that sector, restaurant chains that sell inexpensive food are outperforming the rest, specifically Subway and Wendy’s, says Don DeBolt, president of the IFA. “There’s a lot of trading down going on as people are price sensitive,” he says. “That doesn’t mean a disaster [for high-end franchises], but it may mean that an upper-end restaurant may not be having double digit sales increases. It’s reflective of what’s going on in our economy right now.” DeBolt says sales at the upper-end retailers and for service providers tend to be flat or off by 5% to 6%.
Other hot areas include franchises that perform inexpensive services such as discount lodging and, surprisingly, pet stores. “Anything to do with the types of things that are repeatable experiences are terrific,” says DeBolt. “And people tend to lavish a lot of attention on their pets in periods like this because it’s a fairly inexpensive indulgence.” Another area worth looking into during a slow economy is business-to-business franchises. This market could see some expansion as companies continue to control expenses and look at outsourcing such functions as payroll, tax, and accounting needs.
Some advantages of buying into a franchise include:
- Entrepreneurs can buy into a business with a proven history and brand recognition.
- Franchisees receive multiple purchase discounts.
- Franchisors will often advertise nationally for the entire franchise operation.
- Many franchisors offer training programs and other forms of support to assist franchisees in all phases of running the operation.
Some of the challenges in the industry include:
- Franchisors must be paid royalties each year.
- If the product or service has not been fully tested in your particular area of the country, it could be a risky venture.
- If you are the type who doesn’t like to take “orders” — like so many entrepreneurs — you might not like conforming to all of the particulars involved in a franchisor-franchisee relationship.
- Depending on the franchise agreement, selling the franchise can be difficult.
A franchise is, essentially, a compromise. The entrepreneur gives up much of his or her control in return for being part of a network of businesses. “If you like doing things your way, you’d better go into business yourself,” says Edwin Waldrop, a counselor for the Small Business Administration. “But if you’re willing to compromise, it’ll help you from making some mistakes.”
When considering whether to take the plunge, obtain a copy of the franchisor’s disclosure document (which outlines the most important characteristics a successful franchisee is likely to have). If you’re not