The Big Picture
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
It's been a tough year for business, and franchises are no exception. While the companies on Entrepreneur's 31st Annual Franchise 500® grew overall--adding more than 12,000 units, 2.9 percent above 2008's numbers--that growth was considerably smaller than the 4.7 percent increase of the year before.
And it's no wonder. Not only are many franchisees struggling to keep their doors open as customers tighten their belts, but prospective franchisees are also finding it harder and harder to get the funding they need to pursue their entrepreneurial dreams.
Still, there are franchises that have weathered this downturn--and the recessions, depressions and sundry other crises long before this--and continue to thrive. We're thinking of concepts such as Baskin-Robbins (ranked 47th) and Midas (23rd). A&W, at 289 this year, has been franchising for more than 80 years.
How I got funded without an SBA loan
Amy Lankford, Plano, Texas
My husband, Greg, was in the military, spending nine months in Iraq, and I wanted to have a business ready for him when he returned, so I started saving money to buy a franchise. I went through VetFran and signed a contract for a Signs Now business. Around the same time, I lost my job, so I couldn't save as much as I'd hoped. Things were coming down to the wire last August, and I was getting nervous. The SBA loans I'd applied for were turned down by two banks. So I went to FranFund, and they explained in 15 minutes that there was no way I'd ever qualify for an SBA loan. Instead, within four days, they helped us incorporate. Then we converted our IRAs that we'd built up while working in the corporate world into a 401(k) trust and ordered the 401(k) to invest in our Signs Now franchise. Our 401(k) bought a $130,000 interest, and we issued ourselves stock certificates. We were literally investing in ourselves. Having our money work for us is awesome. --Jason Daley
The answers start with the data from the ranking itself. Across the board, the franchises that grew the most were the ones that serve a budget-minded consumer, didn't cost as much to set up, or both. For example, children's services--always a strong category--had segments that shrank (luxuries such as after-school enrichment programs), while other segments were as healthy as ever, including tutoring and child care. The same was true for the fitness category, which is strong overall, but most robust among franchises that cost less than $100,000 to start up.
As for cleaning services--well, they pretty much mopped the floor among the new franchises and fastest-growing franchises. They are one of the cheapest franchises to buy into--as little as $2,200--and they accounted for six of the top 10 fastest-growing franchises, and three of the top 10 new franchises.
Companies with recession-aware marketing campaigns and products also did predictably well, such as Subway--which the $5 Footlong lifted to yet another year in the No. 1 spot. Subway is also one of the lowest-cost restaurant franchises. Hampton Inn, despite costing a whopping $3.7 million (or more) to start up, made the overall Top 10 this year, largely thanks to travelers looking for good value and Hampton's strong customer satisfaction program.
Of course, there are other forces behind a franchise's success or failure, and in this issue you'll find articles that explore some of the most critical, including a close look at the economy--it's improving, but the battering of the past year has changed the franchise business forever--and some of the best unconventional ways to fund a franchise today.
But to start, here's a look at the top trends revealed by this year's Franchise 500®.
While higher-priced restaurants struggle, takeout and fast-food franchises are more than holding their own: 22 of this year's top 100 franchises are quick-service restaurants, including three of the Top 10 (Subway, McDonald's and Dunkin' Donuts). McDonald's and Dunkin' are also benefiting from the weakening of Starbucks and other premium coffee sellers. And next year, Subway plans to join the fray, rolling out a national breakfast program in partnership with Seattle's Best.
Janitorial franchises don't seem very glamorous, but a look at their numbers may make you think again. An impressive 17 commercial cleaning franchises ranked in this year's Franchise 500®--and every single one of them improved on its ranking from last year. Why? Once again, cost is king. Nearly all of them can be started for less than $25,000. And while businesses are cutting corners on just about everything else, they still need clean offices and they're not likely to take over the job themselves. All in all, commercial cleaning has been recession-proof so far.
It runs counter to the dominance of low-cost franchises, but three convenience stores landed in our top 25, thanks to impressive growth. At the top of the category, 7-Eleven leaped back into the Top 10, with net franchise growth of almost 1,800 units. As the largest company on our list, 7-Eleven could have just hunkered down and comfortably weathered this recession, but the company has pursued an aggressive growth plan instead--taking advantage of lower real estate costs, encouraging independent convenience-store owners to convert to its system and selling off company-owned units to franchisees.
With more than a quarter of the population younger than 20, it's no surprise that there are dozens of franchises aimed at children. But not all children's businesses are created equal. Luxuries such as fitness and enrichment programs stalled in 2009, while less expendable services--child care and tutoring in particular--continued to grow with no sign of stopping. Demand for child care remained strong as stay-at-home parents were forced back to the workplace, while tutors seemed to benefit from parents looking to give children an edge in a more competitive world. Tutoring companies added more than 1,300 franchises from 2008 to 2009.
Americans are expected to spend a stunning $45.4 billion on their pets this year--one of the few areas apparently unaffected by the recession. In the franchise world, in-home pet care is the big news. For example, Camp Bow Wow, a doggy day-care company that began franchising in 2003, broke into our top 500 for the first time this year after adding Home Buddies, an in-home pet care model, to its offerings. Home Buddies is less expensive (as low as $62,000 to start up) and expands the market to include less portable pets.
Always a strong category but, again, the specific franchises that are booming are the ones that can be started for less (in this case, under $100,000). That means Jazzercise, Anytime Fitness and Snap Fitness. Together, the three added 800 new franchises last year. Jazzercise, with startup costs as low as $2,980, scrambled to the top of the category, but Anytime and Snap ranked in the top 100 as well--not bad for two companies not yet 10 years old.
Boomers are aging, and franchises serving seniors are booming. Most focus on nonmedical companion care--three are in our top 100--but newer franchises have brought innovation to the category. For instance, Mirella Salem's motivation for starting the No. 476-ranked Accessible Home Health Care was her own need; when her mother developed asthma, she couldn't find a company offering medical care. She began franchising in 2006, and has grown Accessible to more than 70 units. Other senior-care franchises are branching into different areas: Spectrum Home Services offers handyman, cleaning and yard care, and Caring Transitions (No. 500, and an affiliate of the No. 1 senior-care franchise, Home Helpers/Direct Link) offers estate downsizing and moving services.
Franchises with eco-friendly angles are popping up in seemingly every industry--from cleaning services to lawn care to pizza parlors to hair salons. Even franchises that have been around for years, such as McDonald's, are searching for ways to reinvent themselves to become more appealing to eco-conscious consumers. Others were onto it from the start. When Mark Cannella started a home energy auditing company back in 1995, "green was just a color," he says. But as people became more aware of their carbon footprints, he began getting more calls from folks wanting to start businesses like his. So he began franchising in 2008, under the name Pro Energy Consultants, and by mid-2009, the company had 29 units and franchisees "from engineers to real estate agents to golf pros."