News Column

In a Tough Job Market, Franchising is the Answer for Some -- But Not All (EXCLUSIVE)

May 12, 2010

Rob Kuznia -- HispanicBusiness.com

In September, Alex Modica launched ShelfGenie, a franchise that designs, builds and installs Glide-Out(TM) shelving.
In September, Alex Modica launched ShelfGenie, a franchise that designs, builds and installs Glide-Out(TM) shelving.

Two years ago, Alex Modica was a jet-setting executive earning six figures in the apparel industry.

The Connecticut resident had spent 23 years in the business, working upper management jobs for companies such as Saks Fifth Avenue and Banana Republic.

Then came the recession. In October of 2008, he was "downsized" from his position as a senior marketing manager at BlueFly.com.

Suddenly, Modica was hustling for a job.

For months, he went on interviews, but to no avail. Over-qualification was his primary problem, or so his interviewers said.

"It makes you stop and think, 'What am I going to do?'" he told HispanicBusiness.com. "I'm not an old guy. I'm only 46 -- I'm not dead."

Modica turned to franchising. In September -- nearly a year after he was let go -- he launched ShelfGenie, a franchise that designs, builds and installs Glide-Out(TM) shelving systems.

Quite a departure from his previous line of work, but Modica said he has no regrets.

"I could not be any happier with my decision," he told HispanicBusiness.com. "God willing, it's been very good. We've had growth every month."

Modica is among many high-skilled unemployed workers across the United States who have turned to franchising amid the downturn in the economy.

For him, the option has been a godsend. But it is far from a cure-all.

2009 A Tough Year for Franchising

Franchisers were not immune from economic misery of 2009. That year, franchise businesses reduced employment by 4.1 percent, shedding 409,000 jobs nationwide. Revenue dropped 0.7 percent, or by $5.7 billion, according to a December report from the International Franchise Association (IFA), the world's oldest and largest organization representing franchising.

However, in prior recessions, the industry has bounced back faster than others. After the recession of 2001, franchise companies added 1.2 million jobs over a five-year period, and expanded at an average of 9 percent a year, according to the IFA.

The IFA expects things to turn around. The organization's December report forecast a slow recovery for this year, predicting the industry will reclaim 36,000 of the 400,000 lost. It also forecast a boost in revenues by 2.8 percent, to $868.3 billion.

Alisa Harrison, the IFA's vice president of communications, told HispanicBusiness.com that the organization doesn't yet have hard figures for 2010, but said discussions with individual CEO's indicate some positive movement.

"Many are certainly optimistic," she said. "Some companies are really seeing franchises fill rapidly. But credit remains an issue."

Jeff Young, a franchise consultant with MatchPoint -- an agency that matches franchisees with franchisers -- acknowledged that much of the movement is the result of the rising unemployment rate over the past year.

"It's cyclical," he told HispanicBusiness.com. "With more people out of work, more, by virtue of sheer numbers, get into starting their own business."

How to Get the Start-Up Money?

To start a franchise, prospective owners need to pay the franchising company a start-up fee. In Modica's case, it amounted to $40,000, and had to be made in one lump sum -- no payments.

Franchisees sometimes obtain the money for their start-up fees through home-equity lines of credit.

But Young said that the option is less common, now that the banks have tightened the rules on lending. Others get the money from their personal or retirement savings, and a select few -- maybe 2 percent -- obtain loans from the franchising company, Young said.

The terms of agreements vary, but franchisee entrepreneurs often keep about 95 percent of their proceeds, and pay the franchise company a 5 percent "royalty."

Minorities and Franchising

The IFA estimates that minorities make up about 20 percent of all franchise owners, and that Hispanics constitute about 6.8 percent.

Given how minorities now amount to about a third of the U.S. population -- and Hispanics, 15 percent -- those amounts seem disproportionately low.

However, while roughly 1.8 percent of all white-owned businesses are operated as franchises, 2.1 percent of all Hispanic-owned businesses are franchises. For African Americans, the figure is 2.3 percent; Asians, 3.9 percent, according to Census data.

Also, a 2007 survey conducted by the IFA indicates that minorities are more likely to own franchise businesses than independent businesses. That survey found that roughly 19.3 percent of all franchises are minority-owned, versus 13.2 percent among all non-franchise businesses.

Success Rate is Murky

The success rate of the franchise is difficult to nail down. One oft-repeated statistic among industry insiders asserts that 95 percent of all new franchise businesses are still in business after five years.

Some say this is a myth, and even the IFA has disputed this statistic, calling it dated. It also disputes the frequent claim that the success rate of franchise startups is better than that of regular small businesses.

Among all the nation's small businesses, roughly 70 percent survive the first two years, and about half survive the first five, according to SCORE, a national non-profit organization providing free business mentoring services to entrepreneurs.

So far, Modica is on pace to join the lucky half. Others have gotten off to a slower start.

The Story of Jaime Porras

Like Modica, 45-year-old Jaime Porras is a highly skilled worker who struggled to find a job in the down economy. He grew up in Mexico City, where he thrived as a computer software developer, and started his own company.

In 2007, his wife landed a good job in Houston. The couple relocated with their two kids, now 8 and 6 years old.

For six months, Porras searched for a job to no avail.

"My skills were more management and database design," he told HispanicBusiness.com. "I don't have any specialization on energy or health care. Nothing useful for Houston."

As with Modica, the idea of franchising found Porras, not the other way around. A franchise broker had spotted his resume on a job site, and wanted to know if he'd like to try his hand at opening a franchise business.

"In the beginning I was a little skeptical," he said. "I thought maybe they worked just for the commission."

But the broker with the company FranChoice grew on Porras, and he decided to give it a go.

Like Modica, Porras made an initial investment of $40,000. But he also had to invest in marketing, sample materials and two employees, bringing the total startup cost to $150,000.

In February of 2009, he launched the Houston branch of Floor Coverings International, a shop-at-home floor-covering retailer.

Porras said he expected 2009 to be slow. But the actual performance failed to even meet his low expectations. So far, he's made no money.

"It has all been investing," he said. "I expect to recover some money after next year."

Meanwhile, he admits that his wife is skeptical.

"When she saw that $150,000 was out of the bank, and saw the loss of the last year -- it was very huge -- there was panic," he said. "She is not convinced it can work."

Porras makes home visits to people looking for improvements. He has two employees, one in sales and the other in operations. Their small company contracts out with vendors that perform much of the painting, carpeting and tile work.

Despite the slow start, Porras said he remains optimistic.

"When you see there is movement, and see you're going to have a business that is, in the end, good for your family and everything, I think it's worth it," he said.

The Story of Gilbert Enriquez

Some franchises take off and are almost immediately profitable.

Such is the case with the startup of Gilbert Enriquez.

Since opening his first Hungry Howie's Pizza branch McAllen, Texas near the border, Enriquez -- a former accountant in the construction industry -- has opened another in a nearby town, and plans to open a third in a few months.

So far, his profit margin, depending on the season, ranges from 8 percent to 15 percent, he said.

"I always wanted to be an entrepreneur and open my own business one day," he said.

Hungry Howie's is a pick-up and delivery establishment, with no dining in. This helps keep costs low.

Enriquez's start-up fee was only $15,000 for the first restaurant, and $9,000 for the second.

Unlike Modica and Porras, Enriquez got out of his industry on his own terms, quitting his job in the summer of 2008 after saving up money to pursue his dream. His timing was impeccable: About a year after he quit, the construction industry tanked.

But for all his success, Enriquez -- who now wears a uniform and delivers pizzas -- said he still isn't making what he used to earn as an accountant.

"I'm sure it will get there," he said. "I eventually plan to open four stores."



Source: HispanicBusiness.com (c) 2010. All rights reserved


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