The Current Reality in Franchising

One of the most important drivers of business success is having a vision worth pursuing, one which motivates you and your employees, and one that differentiates your company from the myriad of competing concepts, business models, or persons in the market. It’s not enough to accept someone else’s vision, as you might believe that you have to do if you are a franchisee in a system.

For instance, I have a franchisee client who has as his vision creating 100 millionaire employees working for him by 2010. It’s a vision that has carried him for the past eight years and it is extremely motivating to him and his employees.

But how do you make a vision the reality? Where do you start? It’s one thing to articulate a vision, but another entirely different thing to actually make progress toward that vision.

The first step should be to understand the current reality because without an honest assessment of the true situation, you’re living in a fantasy world. Toward a better understanding of the current reality in franchising I solicited the opinions of three experts, Richard Solomon of  franchiseremedies.com, David Azrin of newyorkfranchiselawyer.com, and Craig Slavin of franchisecentral.com.

I actually asked them three questions:

1. What is the current state of franchising?
2. What are your predictions for franchising in 2010?
3. What one item on your franchise wish list would you like to see come true in 2010?

Let’s focus first on the current reality, and do so from a global view of franchising in the U.S. economy.

Richard Solomon: The current state of affairs today in franchising (2010) is that too many concepts that are not viable are being sold as investment quality opportunities. What makes this a problem is that franchise buyers do not yet understand that they are being told so many whoppers. If the deals were real, the tough contracts would be easier to swallow. The IFA is not to be considered a reliable source for franchise industry information, because their job is constantly to claim that everything is always positive – which it is not.

David Azrin: Because of the state of the economy, I am seeing many existing franchisees really struggling to stay in business.  It is very disconcerting.  Also, because there are so many people out of work looking for a new business opportunity, I am seeing some over-eager buyers looking for new business opportunities, who are not doing their due diligence.

Craig Slavin: After 36 years of experience in franchising I find the current state of affairs somewhat out of control. We have consultants advising companies on how to franchise who have never worked for a franchisor; people advising how to sell franchises who have never sold one and franchisors emerging because an overzealous consultant needs to feed an economic monster they have created and really don’t care if the business model has ever validated. In other industries, professionals are required to be either educated or certified by a governing board or higher institution and not a trade association who is dependent on members for survival. Further, with so many new emerging franchises trying to compete with mature and established companies for buyers the marketplace has become excessively crowded with a lot of ‘noise.”

Peter Birkeland, Ph.D.: My own sense is that franchising is more dependent on the free flow of capital for growth than other business models. In more prosperous times there was adequate supply of capital from banks, from the SBA, and from an accumulation of personal wealth. Today those sources of funds have largely dried up and even though there is a lot of liquidity in the US economy, it appears that most investors are sitting on the sidelines waiting for clear signals that the economy has turned around.

So far, the signals are mixed at best. One of the sources I like for gauging the economy is the Gary Becker, Richard Posner Blog. Both University of Chicago economists are Nobel Prize winners and their perspective on the economy is always put into a historical context so we can understand the current situation with a reference point in mind.

More recently, Gary Becker wrote an opinion piece in the Wall Street Journal. He suggests that the recovery will be slow and painful. Development of retail space normally lags the economic recovery by 18 months, so at best we’re looking at mid-2011 for a return to pre-recession market dynamics.

That’s a global view of the economy and its impact on franchising. Up next, predictions from the panel of experts on what to expect in franchising in 2010

About the author: Peter Birkeland, Ph.D., if the author of “Franchising Dreams,” and Managing Partner of Peter Birkeland Consulting. He works with entrepreneurial start-ups and mature companies to increase productivity and to create strategic growth. He can be reached at peter@birkelandinstitute.com