Is now a good time to franchise my business?

Question: I have been considering franchising my business for quite some time. Did I miss my window of opportunity given the banking crisis? What can I do to make my business attractive to new franchisees? Should I wait before franchising?

Answer: By the time this article is published, a few months will have gone by since you sent me your question and I penned my response. It’s now October 2008. The stock market is bouncing back and forth in the 200 to 400 point range up or down. Banks have yet to start to open up their lending and many of the classic franchise financing sources have yet to reenter the market. The presidential election is two weeks away. So, let me frame my answer with a look into the crystal ball and tell you what I was telling our emerging franchisor clients in October 2008.

Regardless of who wins the election, the first half of 2009 will likely be a low point for the expansion of many franchise systems, with the national deficit continuing to rise.Traditional capital available for many franchisors and franchisees will be strained and 2009 will not be an attractive year for many new franchisor start-ups or for the expansion or modernization of established franchisors for at least a year. But, even with a Democrat sweep, the resilience of entrepreneurship and franchising will withstand the test, and some time in 2010 things should improve and we will again start to see some modest growth opportunities.

Regardless of the outcome of the election, there will be a dramatic increase in mergers and acquisitions as private equity funds enter franchising and take advantage of the bargains that will become available. MSA is currently the advisor to one of the larger investment houses and I have been appointed to join a small group of executives from a diverse group of industries to act as an advisor to the bank’s financial executives and also to the executives of their portfolio companies. Even at the height of the banking crisis, we have already begun to see private equity becoming very attracted to franchising. Smart debt refinancing has begun and we are also exploring with some franchise systems innovative ideas to make capital available to them and their franchisees to sustain their franchise growth projections and planned modernization. Bottom line is that it will not be the marketplace we are used to seeing, but every downturn provides major benefits and the most important is how people look at their businesses. I expect, in spite of the current downturn and anticipated changes in government (taxes, regulations and banking) that franchising will do quite well in the long term regardless of who wins. The difference will be in the timing of when the uptick will occur.

Should you begin to franchise now? It depends. It has never been a good idea to enter franchising without having a feasibility assessment done by qualified consultants, and going forward without such an evaluation at this time would not be a sensible idea. I know that MSA and another well-regarded franchise consulting firm routinely perform this step in their franchise development engagements, either as a formal process or as part of their overview of the client’s opportunity. There are others, who fall into the franchise packaging ranks that avoid that necessary step as they rush to make fees by bringing new franchisors to market. Make certain that whomever you work with, including if you choose to start the process with a franchise lawyer alone, that you make certain a feasibility examination coupled with a GAP analysis is performed before you begin the franchise development process. You may not like the results of the study as it might tell you to delay the launch of your franchise system, or worse, not to franchise at all, but better to know now before you expend a lot of resources in the creation of a franchise program that has little chance of success.

Remember, it will take you somewhere between four to five months to complete the design and development of your franchise strategy and the completion of your legal agreements, operating manuals, training programs, etc. There may be a further delay as you complete the registration process in some states and then there is a period of time required to recruit new franchisees and sign the agreements and learn how to grow and manage a franchise system. Following that, in most cases, your new franchisees need to come to training, find and develop those locations before they even open their doors to the public and begin to send you royalty checks. Quite a lot of time will have gone by. By then, the market will have somewhat recovered and, depending on what the results of the feasibility study have shown and the availability of development capital for franchisees, you should be fine. You have not missed any opportunity, but may need to make changes to suit a different market than you currently have. Making the decision though needs to start with a qualified evaluation of whether or not you are ready to launch and support a franchise program.

Will every concept be right for growth or expansion through franchising? Not every concept ever is. In a tight consumer market, staples will always be needed, low-cost offerings will be more exciting than higher-priced luxury products and services, and those that free up more time for the second wage earner in a family to be economically productive will be highly attractive.

So what should do well? My list will not be complete, but products and services to take care of children and elderly parents; personal care products and services that provide "mini-vacation” experiences; moderately priced hotels as opposed to larger higher-end offerings; family dining experiences; and lower cost entertainment. Also on the list are outsourced business services that enable a reduction in personnel. Gas prices should continue to fall, and therefore auto usage should be on the rise. Automotive aftermarket products and services and anything that relies on a mobile consumer should do fine.

All of these opportunities have one thing in common – they play to the market dynamics that we will be facing in the foreseeable future – a cash-strapped, credit-strapped consumer or one who is concerned that what is happening to their neighbors will ultimately happen to them as well.

Franchising is an amazing vehicle for building wealth – in good times and in bad. The leveraging of resources to expand a brand makes it a great growth vehicle. Its capacity to create jobs and to support a supply chain is why it has and will continue to be the growth engine for our re-energized economy.

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“I have known Michael for almost 20 years and he is as knowledgeable about franchising as anyone in the industry. His approach is pragmatic, creative and strategic. When I need guidance or advice in franchising, I go to Michael."

Peter Hoppenfeld, Principal
Peter Hoppenfeld, Attorney At Law
 

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Michael Seid (860) 523-4257 - mseid@msaworldwide.com

Kay Ainsley (770) 794-0746 - kainsley@msaworldwide.com