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Starting a franchise concept is tough any time, and brutal during the recession. That hasn’t stopped a host of franchisors from trying, or a slew of consultants from charging fees to help them. Which is why investigating a consultant’s track record is a must.
The number of new franchise systems being launched each year plunged during and after the recession, from 325 in 2006 to fewer than 150 in 2010. But is that number still too high?
The statistics are alarming. Even during good economic times, a large number of new franchisors fail to gain traction, and during a recession, failures will increase. But almost half of the concepts launched in 2007-2010 and listed on the website TopNewFranchises.com or in the new franchises sections of trade publications have managed to sell only one or two units or disappeared altogether. Several prominent franchise consultants believe many concepts failed because their owners never should have become franchisors in the first place.
When Ed Kushell founded Franchise Consulting Group in Los Angeles more than 30 years ago, he was among a very few. "Today, anyone who had anything to do with franchising and lost his job is calling himself a franchise development consultant and talking innocent people into franchising their businesses, without validating whether or not they will work," he said.
Added Mark Siebert, president of iFranchise Group in Homewood, Illinois, another longtime consultancy: "We hear from about 400 companies a month that want to become franchisors, and we accept no more than three of them." Siebert and his staff turn down all untested and under-capitalized concepts, plus those that will not provide a 15 to 20 percent return on a franchisee’s investment after deducting for the royalty.
"We advise 70 percent to 80 percent of people who come to us not to franchise," Kushell said. "Many of these new franchise developers don’t inform their clients that the cost of drafting manuals and writing FDDs is only a small part of what they’ll have to spend to become a viable franchisor."
It is difficult to analyze how some new franchisors got into the game, because many of their company phones are disconnected and their websites are dark. And franchise developers who advertise their services on their websites tend to list just their successes.
Rick Grossmann of Denver is one consultant who is reachable. He started a consulting company called Franchise Matchmaker in 2007 after developing his own DJ franchise in college and working at a franchise called All About Honeymoons. On his site, Grossmann left information and testimonials praising his services from seven of the franchises he helped launch during the recession. They include Splish, a chemical-free hair salon; a handyman concept called Mr. Fixall; and a restaurant blind renovator called As Good As New. Those three concepts have been out of business so long that they are no longer listed in their cities’ online Yellow Pages.
When alerted by Franchise Times to the closures, Grossmann said, "I’ll have to look into that."The following day Grossmann called back and said, "Thanks for bringing that to my attention. I didn’t realize how outdated my website is. I’ve taken the pages down."
Although owners of the four surviving franchise systems have had little success, all said they were optimistic about finding franchisees soon. "Rick said our business is the most perfect one he’s ever seen to franchise," said Jay Byerly, CEO of Crystal Rose, a wedding and event center in Denver. "We spent $250,000, all we had, to get ready to franchise, but we couldn’t have opened into a more perfect storm. The recession caused a drop in both weddings and corporate events and every time we came close to a deal, the investor’s financing dried up or the bank backed out of the loan."
Byerly did sell one franchise. But Rockey Flintermann, franchisor of Loving Care Pet Services in Northfield, Illinois, hasn’t sold any. Flintermann, a former TV producer, said he started a dog-walking business in 1998 and added grooming, boarding and doggy day care in the mid-2000s. "We’ve continued to grow ever since," he said, "and now have 5,000 active customers."
Flintermann said he believed his track record would attract others to his business and spent about $100,000 with Franchise Matchmaker in 2010 to become a franchisor. "The economy has a lot to do with it," Flintermann said.
Jaime Coffman, the owner of Fro Yo Spot Frozen Yogurt in Parker, Colorado, said her first franchisee had a grand opening in May "and a lot more people are interested." Joe Mannino, the owner of Victory MMA (mixed martial arts) and Fitness in San Diego, said he sought out Grossmann because, "We had a successful model, of a health club plus kick-boxing and other classes, and thought others would like to open similar facilities." Mannino, who started offering franchises in 2010, has yet to sell a unit. He blames his concept’s high investment—$267,000 to $1.6 million—and the inability of interested people to get financing.
Grossmann also blames the economy for his clients’ lack of franchise sales and said, "We’ve stopped developing new franchises and are focusing on marketing and recruiting to get more qualified leads in for our existing clients."
Despite the rate of failures, franchise developers will continue to find clients. "There are plenty of business owners who want someone to tell them their baby is beautiful," Siebert said.
Added Kushell: "So many people dream of being the next McDonald’s. They think that when they sleep at night, royalties will be rolling into their bank accounts. They don’t understand all you have to do to make that happen."
