A Closer look into Bloomberg’s: “Many Franchisees Get Nothing for Their Investment”

 

A recent Bloomberg BusinessWeek story, “Many Franchisees Get Nothing for Their Investment,” did not paint a full picture for those looking to fulfill a dream of business ownership through franchising, a business model that has been successful for the last 50 years and continues to grow and create jobs for millions of Americans.

The blanket statements made in the article revealed a lack of understanding about how franchise agreements actually work. For example, the author alleged that in all situations involving the turnover of a franchised business, franchisees are unlikely to recover their investment. But this assertion is far too broad. Turnover refers only to the change in the license agreement or contract between the franchisee and the franchisor. For example, the franchisor can terminate the license agreement when the franchisee fails to comply with system standards, or when the franchisee decides not to open additional stores that had been agreed upon in the original contract. Many franchisees do see a return on their investment and some even pass their franchised businesses on to family members.

To make this claim, the article relied heavily on biased reporting by a blogger at BlueMauMau that inaccurately equated “turnover” with the overall performance of the franchising industry, stating that “122 franchises leave for every 100 newly opened franchises.”

The BlueMauMau report inflated the numbers by counting transfers of ownership as “departures”. This is a mischaracterization. In fact, a better measure of franchising industry performance would count more than 46,000 transfers as businesses that continued to operate during this time period under new ownership. When the transfers are added to the 135,000 new outlets that opened, the total number of franchised businesses operating from 2010-2013 is 181,000. This means the number of franchise agreements that were terminated, reacquired, not renewed, or ceased operations for other reasons was approximately 118,000, or about 40,000 per year.  It is a big over-simplification to claim that so-called “turnover” equates with business failure.  In some cases, franchise owners decide to pursue other business opportunities or to retire.

Regardless, any statistic about business performance during this period should be put into a broader context of what has happening in the U.S. economy at the time. Recent data suggested that in 2011 alone, 575,000 businesses – not just in franchising – ceased operation. Additionally, the Bureau of Labor Statistics estimates an average annual failure rate of 45% of all business startups in a five year period. Using this national benchmark, 40,000 franchise departures per year, or an overall rate of 10 percent per year, compares very favorably with other businesses.

Another misconception about franchising repeated in the article is that franchisees are not independent, local business owners. In fact, franchisees do own their businesses. They pay taxes, wages to their employees and permits and fees to local, state and federal agencies. These local business owners have an employee identification number from the IRS and take their profits out of their businesses the same way other business owners do.

There is no guarantee of success when going into any business, including franchises. To be sure, franchise businesses are not immune to failure for the same reasons that other businesses fail – recessions, poor financial planning, lack of management, or personal issues.  Prospective franchisees should plan carefully, consult with a franchise attorney, and thoroughly investigate franchise opportunities before making a decision to invest. However, inflating statements about “high turnover rates” does not do justice to the franchise business model that has created a way for tens of thousands of Americans to pursue the dream of business ownership.  Franchise businesses continued to grow during the worst recession since the Great Depression, at survival rates much higher than other businesses. Today, they continue to create jobs and livelihoods for millions of Americans.

Thanking Our Veterans for Their Service

Our nation is preparing to honor the numerous contributions and sacrifices our men and women who are serving or have served in our armed forces to guarantee our freedom.  Our thanks come in many forms and extends before and beyond Veterans Day.  But as we prepare to celebrate and remember these heroes, many franchise companies are offering their own special thanks.  Here are only a few examples of activities franchise companies are planning for Nov. 11.

  • Baskin-Robbins will donate 10 cents from each ice cream scoop sold in its U.S. locations to the United Service Organizations to support troops, military families and veterans on Veterans Day.
  • Edible Arrangements kicked off its new partnership with Iraq and Afghanistan Veterans of America, an organization for new veterans and their families.  A promotion from Nov. 3 through Nov. 12 will raise money for IAVA and the franchise will participate with the organization in “VetTogether” events at VA hospitals in cities nationwide.
  • Every Pie Five Pizza restaurant nationwide is inviting active-duty, reserve and retired service members to enjoy a free pie on Veterans Day. Service members simply show a valid government/military ID to receive a customized pizza.
  • Home Franchise Concepts’ Budget Blinds brand and national non-profit Home for Our Troops that builds specially-adapted homes for severely injured veterans who served in Iraq and Afghanistan, will provide window coverings in 10 homes across the country between Nov. 1 and Dec. 31,  and will donate window coverings in more than 120 houses within the next three years. HFC is also raising $150,000 that will go to HFOT within the three years of the partnership.
  • JDog Junk Removal & Hauling is offering one free quarter-trailer pick up, which is up to 90 cubic feet of items, to disabled military veterans who book on Veterans Day.  With locations in Pennsylvania, Florida, Michigan, Texas and Missouri, veterans and their families in these areas can rid their homes or businesses of unwanted goods.
  • Maui Wowi Hawaiian is doubling its special discount to prospective franchisees with military experience seeking to own a Maui Wowi franchise. This Veterans Day special is available now through Dec. 31, 2014 and provides a 20 percent discount off of its franchise fee for qualifying military veterans.
  • Orange Leaf Frozen Yogurt will offer retired and active-duty military personnel a free cup of froyo, up to 11 ounces, on Veterans Day. To claim the offer, customers should provide proof of military service or come dressed in their military uniform.
  • Sport Clips Haircuts locations across the country will host the company’s annual Veterans Day haircut event during which $1 per haircut service will support “Help A Hero” scholarships for service members and veterans.
  • Wayback Burgers is saying “Thank You” to more than 19,000 veterans and active duty military personnel on the Port Hueneme Naval Base in California. Veterans and active duty military personnel on the base can choose any item on the Wayback menu for free, no purchase necessary, during normal business hours on Nov. 11.
  • Woody’s Bar-BQ offers men and women in the military that have served and continually serve the United States by giving away a gift certificate for a free barbecue entrée worth $7.99 or less on Veterans Day.

Visit www.vetfran.com for news on what IFA and our member companies are doing to provide opportunities in franchising to our nation’s veterans and their spouses and to find a list of participating companies.

 

 

Resolution No. 4 — Expanding My Professional Network

There’s a networking extravaganza coming your way to help with that.  There’s no shortage of leadership in the franchise industry and IFA’s newly elected board members demonstrate this fact.  One great advantage of this leadership expertise is that in one place over several days you can meet franchise professionals from numerous brands within the industry during IFA’s Annual Conference, scheduled Feb. 15-18 in Las Vegas.

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It’s understood that your time is valuable and it’s difficult imagining several days away from your office or local business whether you’re a franchisee, franchisor or supplier, but there is a bonus.  In addition to ample educational sessions, you’re at the heart of where many of franchising’s stars will be gathered.   There will be noteworthy keynote speakers and other experts, but you’ll also have the opportunity to catch a quick breakfast with a CEO you’ve always wanted to meet.  Or how about sharing development, marketing or best practices advice with a colleague that you’ve been meaning to call and learn that she’s overseeing a panel during the convention?

Making connections, renewing relationships and thinking outside the box in a relaxing atmosphere will enable you to return to your business with fresh ways of attacking old challenges with new solutions.  It will also build your list of mentors, advisors and friends.

There’s still time to register to connect, innovate and evolve.

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FAN in the States

On Tuesday, October 14, IFA staff Erica Farage and Chris Krueger, and a local Philly Pretzel Factory franchisee, Herv Breault took the Franchise Action Network (FAN) to the State Capitol in Harrisburg, Pennsylvania. The event, which comes after recent industry events in Philadelphia, was a continuance of IFA’s engagement in the state.  As a veteran, Herv has achieved his pathway to small business ownership through franchising.

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The group had a productive day of Member and senior staff level meetings with the Pennsylvania Delegation. IFA met with the following offices: Senator David Argall, Senator Shirley Kitchen, Representative Cherelle Parker, Senator Tim Solobay, and Senator Mike Stack. Concluding the day, IFA met with the Policy Director of Tom Wolf, candidate for Governor. Mr. Wolf is currently leading in the polls and projected to be the next Governor of Pennsylvania.

The takeaways were clear – the FAN needs to be heard in every state capitol and lawmakers want to hear from you, the franchise small business owners. Educating lawmakers at the state level is an important part of the FAN and its days like this that allow the lawmakers to learn how important the franchising industry is to their state and communities.  Through the FAN, franchise small business owners can promote, educate and protect the franchise business model and help tell the franchising story to these decision makers. Locally owned franchises are America’s hidden small businesses, IFA asks your support to get involved, please visit www.FranchiseActionNetowrk.com to sign up.

Specifically in Pennsylvania, the IFA will be working with the state delegation offices and our local members to organize a “FAN, Franchising in your State” day in Harrisburg. These events help educate policy makers on what franchising is and the important role franchising plays to the state economy.

If you would like to get involved with legislative meetings in your state, please contact Erica Farage at efarage@franchise.org or Chris Krueger at ckrueger@franchise.org.

Federal Regulation Costs Challenge Small Businesses

Most franchisors and franchisees are well acquainted with the reality of how their businesses can be negatively affected by government regulation.  IFA, which represents these major contributors to the U.S. economy, applauded Calif. Gov. Jerry Brown for vetoing SB 610 that would have devastated the franchise community in California because “Franchising remains the most viable way to own and operate a small business for many Americans, and provides small-business owners with a chance to build equity for themselves and their families.” Although this bill would have only affected one state and those doing business there if it became law, it would have set a new, dangerous precedent.  Imagine the impact of such wrong-headed legislation at the federal level.

Now there is some solid evidence about the impact of a regulation-heavy federal government. A new National Association of Manufacturers report, “The Cost of Federal Regulations to the U.S. Economy, Manufacturing and Small Business” finds that:

  • In 2012, federal regulations cost $2.028 trillion (in 2014 dollars).
  • An average payroll of 21 percent or $233,182 represents the cost burden for an average U.S. business each year.
  • 88 percent of respondents consider federal regulations a leading challenge for them.

According to NAM President and CEO Jay Timmons in the report’s executive summary: “The analysis finds that the average U.S. company pays $9,991 per employee per year to comply with federal regulations. The average manufacturer in the United States pays nearly double that amount — $19,564 per employee per year. Small manufacturers, or those with fewer than 50 employees, incur regulatory costs of $34,671 per employee per year. This is more than three times the cost borne by the average U.S. company.” Learn more about the report.

Join IFA’s Franchise Action Network to defend the franchise model against harmful regulations and legislation. The FAN is a grassroots network that brings together the franchise industry to speak with one consistent, strong and collective voice on the issues facing our industry. On the website, you are able to keep up on current news and issues surrounding the industry, take action at the state and federal level and gain information on franchising and its economic impact across the Nation. By joining the FAN, you will become a critical part in educating and informing lawmakers at every level about the benefits of franchising.

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