Special Report – Franchising

These businesses now employ 18 million doing everything from plant care to elderly care, and appeal to financiers and average Janes alike

Stacy Perman – BusinessWeekonline

When most people think of a franchise business, fast food comes to mind. Franchising, however, long ago grew beyond the burger and fried-chicken shops dotting America’s landscape. Today franchise concepts span 75 different product and service sectors, including such disparate businesses as auto-repair shops, children’s art centers, and fitness clubs. The franchising business model has turned into a major economic engine — one that’s providing increasing opportunity for companies and individual entrepreneurs alike.

In this multipart Special Report, to be rolled out over the next few days, BusinessWeek Online explores the state of franchising: what’s new, what works, and how entrepreneurs have merged their talents with proven systems, giving them the opportunity to create new niches and run their own businesses.

PROVEN PROFITABILITY. It wasn’t too long ago that a slew of dubious get-rich-quick schemes sullied franchising’s reputation. But in recent years, with federal regulation and the oversight of industry trade organizations like the International Franchise Assn. (IFA) in Washington, D.C., franchising’s standing in the business community has risen considerably. Indeed, according to the IFA, some 760,000 franchise businesses generate jobs for more than 18 million people, or 14% of the nation’s private-sector workforce. That represents $1.53 trillion in economic activity, or 9.5% of the private sector’s total output. The IFA expects franchising to grow 6% this year.

Although the concept has a long history, franchising really took off in the 1950s when companies like McDonald’s (MCD ) and Holiday Inn started sprouting up across the country. Back then, an estimated 100 franchise systems existed. Today, they number roughly 2,500.

With a track record of profitability, broad geographical appeal, relatively low initial capital investments, and easily replicated models, franchising has become more attractive — for both companies looking to expand and individuals looking to run their own businesses.

“SOLID SYSTEMS.” The recent surge in interest within the investment community, which views franchisers’ strong brands and steady cash flows as sound opportunities, is one sign of franchising’s rising prominence. Consider Riverside Group, a New York City-based private-equity firm with $1 billion in assets. In October, 2003, it acquired Dwyer Group, a holding company in Waco, Tex., that owns six service-based franchising companies, including Mr. Appliance and Glass Doctor, for $55 million. It marked the firm’s first franchise acquisition — but likely not its last.

“We like franchises because they’re good solid systems with predictable streams of royalty,” says Loren Schlachet, a San Francisco-based Riverside principal. “We saw a real opportunity with Dwyer. They had a strong management team, and their brands have a high level of recognition with consumers.”

More recently, in March, a group of venture capitalists formed Franchising Ventures Group in Dallas specifically to identify established businesses that they believe will be the next generation of franchising success stories — and then develop and continue franchising them.

“GOLDEN AGE.” A volatile economy over the past several years has continued to drive both the growing number of concepts and rising volume of franchisers and franchisees. For companies looking to expand with little cash on hand, franchising has become a popular way to get there. And although franchising by no means offers guaranteed success, it has developed as a welcomed option for individuals burned by downturns and layoffs and eager to start their own businesses with mitigated risk built in.