As 2010 comes to a close, it's fun to dust off the proverbial crystal ball and predict what the coming year may hold in store for the franchise world. But first, a quick review of the upheaval that the franchise industry has endured in the past two years is in order.
Since 2008, the U.S. has seen a huge increase in unemployment, the worst recession since the 1940s and the near disappearance of the credit market for startup loans. These conditions are now being referred to as the "new normal." It might be some time, if ever, before the economy and franchising return to the boom days that were the norm for most of the past decade.
As an observer of market ups and downs over many years, I've learned to never discount the entrepreneurial spirit. Though starting a franchise has become more difficult than it was just a few years ago, I see some compelling signals that the industry may be turning a corner despite continued weak consumer confidence and economic uncertainty.
My crystal ball tells me that three trends may make franchise ownership easier and more rewarding in 2011 than it has been in the recent past. These changes are coming in the following key areas:
Financing. Over the past two years, the credit market has been all but shut down for new business startup loans in the past two years. It's in reaction to the problems resulting from years of undisciplined and imprudent lending.
But I've recently seen a number of small startup loans (less than $200,000) backed by the Small Business Administration approved by former big players in small-business financing. I've even seen a few conventional loans approved, albeit with significant non-business asset collateral, by local and regional banks and other traditional sources.
These small steps are an encouraging sign that the market may be on its way back to a middle-of-the-road position for making lending available on a sensible and prudent basis to people who can show that they are a good credit risk. That change may put franchise ownership back into the possibility column for those who have been frozen out due to lack of financing.
Real Estate. The correction in the commercial real estate market, coupled with a huge reduction in demand, has created opportunities for franchisees scouting new locations. On top of that, increasing vacancy rates have expanded the number of attractive real estate choices available to franchisees. The terms are often stunningly better than any seen in many years.
Base rental rates in many areas have declined to levels of more than a decade ago, and space subleased by companies downsizing operations may be available for even less. What's more, tenant improvement allowances available to new renters are often much larger, and these can substantially reduce the investment capital needed to start a new business. The franchise industry is seeing the best buyer's market for real estate in many years.
Opportunities. Lenders weren't the only ones who were sometimes operating fast and loose. A number of franchise operations sprang into existence and expanded rapidly without the foundation to produce long-term success for investors.
The marketplace has gotten wise to this, and so have franchisors. Many have worked to lower investment requirements, increase operating margins, attract and retain more customers, and help their franchisees produce more earnings faster. The best systems are seeking to communicate the results of these efforts to prospective franchisees. Many companies are expanding their financial information on their Franchise Disclosure Documents, and some are trying to make their opportunities even better, a positive development for the franchise marketplace.
As encouraging as these signs may be, franchise sales remain in a deep funk because prospective buyers continue to be reluctant to invest in new business startups. The uncertainty over unemployment, taxes, health care programs and increasing government regulation have many waiting on the sidelines for greater clarity before taking the risk of starting a new business.
The recent midterm elections, in which the Republican Party made gains in the U.S. Congress and in state legislatures and governorships, raised hopes that a new spirit of compromise and cooperation may take hold in the U.S. politics. If it does, a sense should increase that a stable playing field exists for those opening a business. A lot of folks say they are waiting for that assurance before they invest in a new franchise.
None of these trends are likely to move franchising back to its 2006-2007 expansion heydays. But they may point to an industry that is moving to a "new normal," more favorable to business development, and savvy investors who do their homework may have a better chance of finding opportunities.
Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.