Extending the Front Lines of Franchising
When most people think of a franchise business, fast food comes to mind. Franchising, however, long ago grew beyond the burger and fried-chicken shops dotting America's landscape. Today franchise concepts span 75 different product and service sectors, including such disparate businesses as auto-repair shops, children's art centers, and fitness clubs. The franchising business model has turned into a major economic engine -- one that's providing increasing opportunity for companies and individual entrepreneurs alike.
In this multipart Special Report, to be rolled out over the next few days, BusinessWeek Online explores the state of franchising: what's new, what works, and how entrepreneurs have merged their talents with proven systems, giving them the opportunity to create new niches and run their own businesses.
It wasn't too long ago that a slew of dubious get-rich-quick schemes sullied franchising's reputation. But in recent years, with federal regulation and the oversight of industry trade organizations like the International Franchise Assn. (IFA) in Washington, D.C., franchising's standing in the business community has risen considerably. Indeed, according to the IFA, some 760,000 franchise businesses generate jobs for more than 18 million people, or 14% of the nation's private-sector workforce. That represents $1.53 trillion in economic activity, or 9.5% of the private sector's total output. The IFA expects franchising to grow 6% this year.
Although the concept has a long history, franchising really took off in the 1950s when companies like McDonald's (MCD ) and Holiday Inn started sprouting up across the country. Back then, an estimated 100 franchise systems existed. Today, they number roughly 2,500.
With a track record of profitability, broad geographical appeal, relatively low initial capital investments, and easily replicated models, franchising has become more attractive -- for both companies looking to expand and individuals looking to run their own businesses.
The recent surge in interest within the investment community, which views franchisers' strong brands and steady cash flows as sound opportunities, is one sign of franchising's rising prominence. Consider Riverside Group, a New York City-based private-equity firm with $1 billion in assets. In October, 2003, it acquired Dwyer Group, a holding company in Waco, Tex., that owns six service-based franchising companies, including Mr. Appliance and Glass Doctor, for $55 million. It marked the firm's first franchise acquisition -- but likely not its last.
"We like franchises because they're good solid systems with predictable streams of royalty," says Loren Schlachet, a San Francisco-based Riverside principal. "We saw a real opportunity with Dwyer. They had a strong management team, and their brands have a high level of recognition with consumers."
More recently, in March, a group of venture capitalists formed Franchising Ventures Group in Dallas specifically to identify established businesses that they believe will be the next generation of franchising success stories -- and then develop and continue franchising them.
A volatile economy over the past several years has continued to drive both the growing number of concepts and rising volume of franchisers and franchisees. For companies looking to expand with little cash on hand, franchising has become a popular way to get there. And although franchising by no means offers guaranteed success, it has developed as a welcomed option for individuals burned by downturns and layoffs and eager to start their own businesses with mitigated risk built in.
"This is the golden age of franchising," says IFA Chairman Sid Feltenstein, the former chairman and CEO of Long John Silver's and A&W Restaurants, which he sold in 2002 to Yum! Brands (YUM ), which operates Taco Bell and KFC. "More people want control over their lives and security for their families."
While franchising opportunities appeal to a range of entrepreneurs, lately it has become a real opportunity for women. Not surprising, that reflects the growing ranks of female business owners overall. According to the Center for Women's Business Research, 10.6 million privately held companies are now at least 50%-owned by women. And from 1997 to 2004, the estimated growth rate in the number of female-owned companies reached 17%, nearly twice that of all businesses, at 9%. Having historically faced higher barriers -- such as access to capital -- than their male counterparts, entrepreneurial women continue to find franchises attractive.
"Owning a business is the American way, and franchising is one option for them to start a business," says Susan Phillips Bari, president of the Women's Business Enterprise National Council, an advocacy group in Washington, D.C. "It provides structure, name recognition, and a process, without having to start from the ground up."
Reflecting America's transition to a service economy, the proliferation of two-income families, and the continuing change in the nation's demographics, franchising is shifting from traditional concepts like food to more service-oriented businesses. Concepts such as Pressed4Time, a mobile dry-cleaning and shoe-repair franchise, and My Girl Friday, a franchise concierge service that runs all manner of errands from plant watering to grocery shopping, have emerged in response to busy consumers who need to simplify their daily lives.
Franchises geared toward baby boomers and an aging population are among the fastest growing. Gyms and wellness centers have surged in popularity, as have outfits like Comfort Keepers, an in-home, nonmedical day-care provider for elderly people, and Interim Homestyle Services, a home-care and supplemental health-care franchise. According to the IFA, the number of senior-care franchising systems jumped 40% from 2000 to 2004. With 12.5% of Americans now past the age of 65, services that keep people looking younger and living longer are expected to show continued growth.
Now an established pillar of the small-business community, franchisers want to perpetuate their progress. To that end, the IFA is increasingly flexing its muscle in Washington over concerns like affordable health care, immigration reform, solid support of Small Business Administration lending programs, and minimum-wage issues. "If the regulatory climate isn't healthy," says Matt Shay, president of the IFA, "then from a business perspective there's no way for franchises to grow and create more opportunities."
These days, with the right concept and people behind them, those opportunities abound.
By Stacy Perman in New York
Edited by Rod Kurtz