Q&A: Downturn changing the franchise game

Posted by Ann D. at 11/17/2009 10:26 AM CST

One effect of the recession and high unemployment rate is that some people who have lost their jobs are becoming entrepreneurs instead of searching for new positions in their fields.

Affiliating with a franchise is one way for people to strike out on their own without having to develop and launch a business concept from scratch.

Laurie Pollock helps potential Chicago-area entrepreneurs investigate franchise opportunities; she’s a senior franchise consultant at the Toronto-based MatchPoint Franchise Consulting Network. She tells Crain’s contributor Steve Hendershot how the franchise marketplace has changed during the downturn.

Crain’s: How has the franchise candidate pool changed during the recession?

Laurie Pollock: Very few candidates have prior experience as entrepreneurs; most are coming from a corporate background. When I started seven years ago, most of them were gainfully employed but wanted to own their own business. We would meet over their lunch hour or at night to discuss the possibilities. Now most of the candidates are people who are out of work, and they have all day long to focus on franchise opportunities. A lot of them seem to come from IT jobs, or financial services, and they’re spending down their savings, their retirement, hearing that there are hundreds of résumés in for the jobs they’re applying for, and it gets to a point of panic where they have to make a decision.

Crain’s: How have franchisers reacted to the changing profile—including the economic circumstances—of potential franchisees?

LP: In terms of the investment required, franchisers aren’t reducing their fees. Instead, I find myself referring candidates to lower investment concepts because I’m seeing on the candidates’ balance sheets that they’re really struggling.

A fixed-site franchise like a Great Clips may be $150,000-$250,000 to put together. With a restaurant, it can cost $1 million to get it up and running. But a home-based business like a tutoring franchise might run $50,000-$80,000 all-in. That includes a franchise fee of $25,000 or $30,000 that you pay to license the concept for 10 years. So I’m seeing more home-based businesses and more service businesses instead of retail. A business where you take your service to the customer — CertaPro Painters or Mr. Handyman — most of those break even within the first year.

Crain’s: Are the first-time entrepreneurs able to cut it launching their businesses in such a difficult market?

LP: The franchisees are still seeing success, even though there’s a recession out there. The franchisers are helping people hold on. Industrywide, there’s an 80% to 90% success rate after five years.

Opening a franchise does reduce your risk (compared with starting a business from scratch). You get support, guidance, resources — a lot of franchisers will assign you a business coach for the first year. There’s so much that comes with a franchise system that you’d have to create yourself otherwise: The franchiser will build your Web site, provide customized business management software, and, of course, marketing.

With a franchise, it’s like you have a very large cooperative pooling of funds to build that marketing arm, and you’ve got people in the corporate office testing and churning out new marketing programs, and then the other franchisees are reporting back on how they work. Over time, the business model gets perfected and the things that don’t work get cast aside.