Turn it Up in the Down Turn

Bad economy? Forget about it. Why now is a great time to buy a franchise.

SHARE

There are 277 homes in the Clermont, Florida, neighborhood where Ronald Oliver lives, and he estimates that 80 of them are in foreclosure. But that gloomy news didn't stop Oliver from quitting his job as a supervisor at Universal Studios and becoming the co-owner of a Maaco paint and auto-body repair franchise in Kissimmee.

Since opening in July, Oliver and his partner, former Universal co-worker Kenny Lagreca, 39, have focused on aggressively marketing the business. Oliver, for instance, has handed out 1,700 business cards around town to local businesses. That legwork paid off not only in an exclusive contract to serve a local car dealership, but also in a steady stream of individual customers. In the shop's first 30 days, Oliver says they gave more than 600 estimates and worked on more than 100 cars, eventually making about $168,000 in the first two months.

Oliver says being part of Maaco gave the pair many advantages over starting an independent repair shop, from professional site-selection advice to a bankable brand name that helped get their $500,000 SBA loan approved. "We put our shop on a plot Maaco helped us find, put our sign out, and we haven't stopped since," says Oliver, 35. "We're starting out at a bad time, but it's working out really well."

When times get tough, franchising can offer many advantages over going into business on your own. "Buying a franchise makes more sense in this economy than either buying an existing stand-alone business or opening your own business," points out Michael Katz, president and CEO of The Franchisee Consulting Group. "You're getting a proven system and being taught how to do it correctly. You've got a leg up on any mom-and-pop competition."

Franchises also have a proven track record of powering through previous economic downturns. International Franchise Association figures for 2001 to 2005 show that despite the downturn that came after 9/11, the franchise sector's economic output had average annual growth of 9.7 percent, about three times greater than the economy as a whole.

Opening in a downturn, however, requires careful research and planning, says IFA Educational Foundation president John Reynolds. With franchise sector growth possibly ramping up slower in the next year than it would have a year or two ago, missteps can be fatal. So proceed with caution. Now's not the time to fall in love with a concept and, starry-eyed, take the plunge. "The finances have to work," says Reynolds, "no matter how much you love the business."

Good News, Bad News

The current economic decline has a couple of unique aspects compared with previous downturns. The good news? In many markets, commercial and retail real estate is cheaper and more available than it has been in a long time, notes Michael Seid, a franchise consultant and the co-author of Franchising for Dummies.

Many chains are scaling back or closing, from Bennigan's restaurants to Starbucks. That means landlords have empty spaces and are motivated to fill them. "I'm seeing something we haven't seen in years: landlords coming to the table with build-out allowances," says Seid. "Previously, if you'd mention it, they'd start laughing."

The bad news? Finding funds for your purchase may be tougher now than at any time since the savings-and-loan scandal of the '80s, Seid says, especially if you don't have good credit. The banking-sector subprime mortgage meltdown that began in the fall of 2007 means many banks have less money to lend and are skittish about making riskier loans. Many prospective franchisees are looking to alternative financing to get around this hurdle (see "Financing Gets Creative" on page 99), and Seid says lower-cost franchises are gaining popularity this year.

As entrepreneurs contemplate buying franchises, they should take care not to overextend themselves financially, says Reynolds. It's hard to predict how long it will take for a new franchise to turn a profit, especially now. To make sure you won't run out of cash, Reynolds recommends running your projects by a financial advisor. "If you put every dime into a startup and it takes you a while to get the business going, that's a huge risk," he says. "You should reserve a portion of that as working capital for the first year or two."


TAGS:
entrepreneurship
franchising
recession