Franchise Buying Guide

Pushing Forward

Is enough being done in the franchise industry to encourage diversity? An expert has his say.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

While minorities currently make up only a small percentage of franchisees, many believe this underserved population represents the future of franchising--and for good reason. U.S. Census data indicates that minorities will account for nearly 90 percent of the nation's total population growth between 1995 and 2050. Already, the share of businesses owned by ethnic minorities increased nearly 22 percent from 1997 to 2002, according to U.S. Census data. That represents a 33 percent increase in the number of ethnic minority-owned businesses.

As a result, independent organizations have formed to unite the nation's franchises in a push toward diversity--the most recent being the Diversity Institute formed earlier this year by the International Franchise Association.

Serving as a member of the board of trustees for the IFA Education Foundation is C. Everett Wallace, whose work as co-founder of the National Minority Franchising Initiative helped bring about the Diversity Institute. I recently spoke with Wallace about the current state of minority franchising.

Wilson: What are the main obstacles that prospective and current minority franchisees are facing?

Wallace: The biggest obstacles can be summed up in three very simple parts. I call them the "gaps." One is the information gap. The minority community is not as well-informed about franchising and its opportunities. The second one is a relationship gap--because [minorities] are less informed and less involved [in franchising], they have fewer [franchise] relationships. [A white franchisee] may be able to find someone--brother, sister, mother, father--who is either in franchising or knows somebody who's in franchising. As an African-American, I have a harder time doing that, because there are fewer African-Americans in franchising. The third one, frankly, is a capital gap. There have been some studies done on this, and the majority of franchisees [obtain] funds through friends and family. If you're African-American or Hispanic, and you start off asset-poor to begin with, your family is asset-poor. I'm not going to call my mother and say, "Can you give me $50,000 to start this franchise?" She's calling me up to see if I can send her $100.

We're at, I think, a 70 percent to 72 percent home-ownership rate for Caucasians in this country, and we're just basically breaking 50 percent for African-Americans. A lot of the franchisees who get started are able to do so by mortgaging the equity in their houses, but that presumes you have a house. You can't be in a horse race without a horse.

Do you think these challenges are surmountable?

We have worked and continue to work to make sure we are creating a greater awareness of the various programs out there to assist minorities and others. There are two different kinds of programs. Some of them are race-based--that is, they're doing something to specifically help minorities. More often, the programs are place-based. They are oriented toward helping lower-income, disadvantaged communities, which, in many instances, often turn out to be minority communities. You can get some consideration for helping to improve or bring businesses to those communities. So those represent opportunities for different minorities who would want to open a Dunkin' Donuts [in the inner city].

So you believe the resources are out there--it's just about closing that gap and helping minorities discover the resources that are available to them?

Totally. In all three cases, it really is about coming up with programs that are capable of closing that gap.

What might minority franchisees face once they start their businesses?

I absolutely believe that prospective franchisees have to go in with a certain level of awareness. That is, if you're buying a franchise that has not historically been in the community you're going into, you need to explore how likely it is that the brand is going to be well-received. So you may have to work a little more closely with franchisors, because they haven't tested their brand [in that community] and they don't quite know what people's expectations are for their brand. You have to be aware of that, but that's really more of a business issue. How aware or prepared are you to understand the business nuances that you're getting yourself into?

Do you feel that franchising opportunities for minorities exist only in the inner cities?

I think they exist all over the place. You have so many folks who are, frankly, of color but don't necessarily have their businesses in the minority community. So I don't think that's a barrier--that if you're black, you have to sell your goods in the black community. But I would like to see more of those opportunities being created--that people who are of an ethnic persuasion are able to bring to their community those branded concepts--because there is a lot of advantage to using and having those brands. Having those brands in the community says something about the quality of the community. The presumption is that the brand wouldn't be there if they did not perceive that the brand was going to work in the community.

Do you have an estimate of what percentage of minorities own franchises?

Our [organization] estimates that probably less than 8 percent to 10 percent [of franchisees] are minorities. This country is rapidly [approaching] 30 percent minority, so there's still a long way to go.

With these figures in mind, what does the future look like for minority franchising?

I think it looks very good. The increased emphasis that the IFA is placing on minority franchising opens up opportunities for more minorities to become involved in the future. If you look at McDonald's, for example, it has a very good record. One of the reasons, in my opinion, is that McDonald's accepted the notion of market segmentation as a way of advertising their products. They started--back in the '60s--understanding that it would be good for them to have people of color representing those communities of color that their brand was going to show up in. If you look around, you'll find that there's kind of a [viral] thing going on, because what a franchisee does is call up his brother-in-law and say, "I'm making crazy money here. You should try to get involved with it." That's truly how it's happened [with] other brands.

That's why I go back to the relationship thing. You [say to] people you know, "I've got a great opportunity; you should try to get involved with it," and the next thing you know, I have my cousin or brother or sister and it just turns out that we're all Italian or we're all Irish. It wasn't because we planned it that way. It's because those were the people I knew best, so when I had an opportunity, those are the folks I picked up the phone and called.

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This article was originally published in the December 2005 print edition of Entrepreneur with the headline: Pushing Forward.

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