Article on Franchising from New York Times, 1992

Here is an interesting article from the New York Times that quoted Francorp Consulting on the current economic climate of 1992 and how franchising was being affected.

All About/Franchising; Hamburgers or Home Decorating? Businesses That Sell
By VERONICA BYRD
Published: October 4, 1992

Though the harsh economic climate has battered many major corporations, franchisors, the companies that license their names and expertise to entrepreneurs eager for a lucrative piece of the American Dream, have as a group seen increasing gains in both ownership and sales.

In fact, part of that lift has come because of the recession, as companies cut back by dismissing workers with severance pay and offering sometimes-generous buyout plans. Many former executives, managers and employees have turned to buying franchises.

For an initial investment and yearly royalty payments, franchise buyers can often get training, business name recognition, start-up financing and even advertising help.

This weekend, more than 25,000 people curious about joining those ranks are expected at the American Franchise Association show at Nassau Coliseum in Uniondale, L.I. There, some 120 companies have set up booths to display their versions of how easy it can be to prosper as a franchisee.

But a darker side of the industry is emerging. Saying that they were misled by slick or unscrupulous companies, franchisees are increasingly calling for new Federal regulations. Many of these business owners say franchisors hype the potential for profits, pressure them to sign one-sided "take it or leave it" 50-page contracts and provide little help afterward if their operations run into trouble.

The International Franchise Association, a Washington-based trade group that represents more than 800 franchisors, dismisses such charges as the complaints of a small number of people who probably do not have what it takes to run a business. Starting Up The Industry Gains During Hard Times

The total number of franchises in the United States grew 4 percent, to 542,496 in 1991, from 521,215 in 1990, according to Francorp Inc., a franchise development and consulting firm. That is expected to rise nearly 15 percent in 1992, based on the rosy projections of a study this year by the I.F.A. John Reynolds, executive vice president of the association, acknowledged that in light of last year's meager rise, the expected increase "is very optimistic." He added, that "it doesn't mean that every single franchise will do this well."

Continued growth is expected in print shops, restaurants, retail shops and car servicing outlets. New kinds of franchises expected to surge include Kitchen Tune Up, a remodeling business, and United Coupon, a small-business coupon service. And businesses targeting the booming children's market, like USA Baby, a furniture store, and those aimed at older people, like Reading Glasses to Go, should also do well, consultants say.

"The franchise industry thrives during tough economic times," said Michael H. Baum, executive vice president of Francorp, which is based in Olympia Fields, Ill., outside Chicago. "When recessions hit, a lot of people who are out of work start their own businesses. They often don't have a lot of capital, and franchising is the best way to go into business without a lot of capital."

Some franchises, like a simple home decorating or commercial-cleaning operation, can be started for as little as $5,000, but the average investment, including equipment and other initial costs, is about $140,000. And the privilege of owning a top established restaurant or hotel can cost $1 million or more.

In addition to a one-time franchise fees, franchisees are required to pay yearly royalty costs, typically 2 percent to 8 percent of gross sales.

Franchises "come with a lot of the same risks as any small business," said William B. Cherkasky, president of the International Franchise Association. "But because of the many support services provided there is a far greater chance of success than starting a small business on your own." The Competition Sometimes, Dreams End Up Going Sour

Even franchise buyers who thought they had done careful research have ended up losing their homes and cars when their business soured.

Especially vulnerable are franchises built on an idea that is easily duplicated. Owners of The Country's Best Yogurt, also called TCBY, found themselves in fierce competition for customers as the franchisor, based in Little Rock, allowed too many shops to be established near one other. At the same time, two or three other yogurt franchises were vying for the same spaces in shopping malls and business districts around the nation.


Published: October 4, 1992
"Frozen yogurt is a seasonal product with not a lot of upscale potential," said Mr. Baum of Francorp. "Other more diversified snack food companies began offering the same product and taking their business away."

Consultants advise obtaining a copy of the franchise disclosure circular, one of the few documents the Federal Trade Commission requires of all franchisors. The circulars include a detailed description of the business, start-up costs and applicable fees.

But when it comes to dealing with a franchisor, it is wise to remember that "franchising is simply a relationship, a method of distribution," said Edward Kushell, president of the Franchise Consulting Group. "One of the most important things to learn is how to manage that relationship."

Some chains seem to have as many stores close each year as they have new ones opening. But figures from an I.F.A. study found more than 95 percent of companies opened in the last five years were still operating.

Mr. Reynolds of the I.F.A. did note that 15 percent of the franchises that opened in the last five years no longer had the original owner.

"That means that something happened to those people," he said. Making the Choice Shopping Around For a Business

Many of the newest franchise owners are former corporate executives who were laid off or became disgruntled with corporate life.

Donald Boyle opened his Alphagraphics Printshops of the Future store in March 1991 in Stamford, Conn., with a $340,000 start-up investment. He decided he could use his managerial and sales skills -- gained from more than 25 years in retailing -- to break the company's record for first-year sales.

Mr. Boyle, a former executive vice president with Lord & Taylor, and former chairman of Hahnes, a department store, accomplished that and more. His store had almost $500,000 in sales the first year, he said.

Begun in 1970 in Tucson, Ariz., the Alphagraphics chain now has 325 stores in 14 countries.

Wayne Hale and his wife, Carolyn, of Crossville, Tenn., spent more than a year extensively researching restaurant franchises before buying a Krystal Kwik hamburger outlet. The fast-food restaurants have dual drive-through lanes and outside seating only.

In addition to researching food costs, employee training and legal fees, Mr. Hale parked near restaurants and counted the cars in their lots. "That gave me a pretty good idea of the kind of traffic the restaurants were getting on an average day," he said.

The Hales opened their first Krystal Kwik in Crossville, about 80 miles west of Knoxville, in September 1990, becoming the first Krystal Company franchisee. They have just opened a second one in Cookeville, about 40 miles east of the first restaurant.

Mr. Hale, who had owned a medical equipment company, said 18-hour days, seven days a week were typical for the first six months. But he is optimistic that his Krystal Kwiks, where a hamburger costs 43 cents, will be a big draw for families. "People are very conscious of their spending," he said. But at Krystal, you can feed an entire family with $10 and have change left over." OPEN-DOOR RECRUITING

When Renee C. Greenleaf and her family began the search for a franchise, their biggest concern was finding one "that would provide a needed service to the community, rather than one that was a luxury," she said.

Ms. Greenleaf, the owner and operator of a Mail Boxes Etc., which provides postal and business services in downtown Newark, said she; her mother, Marguerita Calloway, the company's vice president, and her brother, Albert Calloway, who is president, were attracted to franchising because of the training and skills they could take advantage of.

"An independent person would have to stumble over and take the hard knocks for themselves," Ms. Greenleaf said. "But the franchisors are there to provide the necessary training and ongoing support."

The Calloways, who are black, are among a small, but growing, percentage of minorities in franchising.

Franchisors say they are increasing their efforts to recruit more women and minorities into the industry by aggressive recruiting, advertising and special programs.

In April, the International Franchise Association created the Alliance for Minority Opportunities in Franchising with the goal of increasing the number of opportunities for women and minorities to own franchises and to expand the use of minority vendor and supplier companies.

About 14,000 -- or 2.5 percent -- of the 550,000 United States franchises are minority-owned, according to the Department of Commerce's Minority Business Development Agency in Washington. In a study of 366 franchise companies, the International Franchise Association reported 9.5 percent were owned by minorites.

Reaching out to women and minorites "is not a social responsiblity but a business imperative," said Ron Harrison, the chairman of the I.F.A.'s Minorities and Women in Franchising Committee.

The committee is encouraging major franchisors like McDonald's, Baskin-Robbins and 7-Eleven to develop programs and become more involved in their local communities.