Even With a Map, the Road Is Rocky; Despite Economy's Gloom, Entrepreneurs Flock to Franchise Model

Date

Mar 11, 2013

Ian Swain lies awake at night thinking of the costs he and his partners face for the two franchise restaurants they begin construction on today.

Their location, at the intersection of Florida and New York avenues in Northeast Washington, is "the hottest corridor of real estate in town," he tells himself, which is helpful to think about, considering the $250,000-plus they are shelling out for the side-by-side Heidi's Brooklyn Deli and Sister's Pizza and Mussels that they plan to open this summer.

He launched his first business, Candy Man Enterprises, selling snacks from a duffel bag at Archbishop Carroll High School. After college, he dabbled with friends in small development deals, and then real estate management. Today, Swain, a 32-year-old husband and father of three young boys who lives in Bowie, thinks he has found a way to reduce risk and boost his chances of success by buying franchising rights from a company he believes is a winner.

According to a recent PricewaterhouseCoopers study, the franchising sector accounts for 18 million jobs in the United States and $1.5 trillion in annual economic impact. And the rate of employment growth in franchises, which number more than 760,000, outpaces the overall economy, the study said.

Franchises are often seen as a good way for newcomers to start a business. For a fraction of the capital it would take to launch a business from scratch, franchisers can build one that comes with a basic road map. (Panera teaches you how to make the sandwiches. It's up to you to get the show up and running.)

But it's not a guaranteed route to success. In franchise-driven industries -- restaurants, hotels, motels -- failure rates are significantly higher than in others such as technology and equipment, said Scott Shane, professor of entrepreneurial studies at Case Western Reserve University in Cleveland and author of "The Illusions of Entrepreneurship."

Now is a particularly tough time to launch a business, with fuel and material costs up and more Americans cutting back on discretionary spending.

Nevertheless, last week, more than 140 aspiring entrepreneurs gathered at the University of Maryland to hear bankers, developers and business executives explain how temp services and copier cartridges could be the keys to securing their economic futures. At the day-long seminar for women, minorities and veterans, hosted by the International Franchise Association and the Prince George's County Economic Development Corp., would-be franchisees were told that if they researched their options and picked their business and location well, they could capitalize on the fact that commercial rents have fallen.

Conference attendee Gina Frizzel said she aims to create a business that will enable her to retire in the Caribbean. LaSaron Fulmer wants to set an example for her kids that goes beyond the earn-degree, get-job, work-until-retirement kind of life. And Latisha Washington is looking for something that will allow her to step away from the corporate world and become her own boss.

Over the years, the franchise business has attracted relatively few minorities. About 6 to 9 percent of the franchises in this country are owned by African Americans, Latinos, Asians and Native Americans, according to the International Franchise Association Education Foundation.

A host of studies and surveys points to obtaining capital and business support as primary barriers for female and minority entrepreneurs. Although the number of minority-owned businesses has risen in recent years, with groups such as the National Association of Black Hotel Owners, Operators and Developers reporting a twentyfold gain in their ranks, research suggests that discrimination has made it difficult for minorities to venture beyond smallscale retailing and personal services.

Timothy Bates, an economics professor at Wayne State University in Detroit, said in a study last year that many programs designed to assist minority business executives "generate little entrepreneurship because they relegate minority firms to overcrowded, low-growth lines of business." A separate study by Bates said limited access to capital may be one of the greatest challenges for minority business entrepreneurship.

Lenders are inspecting prospective franchisees' finances with a more critical eye these days and will demand a signed lease, or at least a letter of intent, before approving a loan, said Edward Lawings, president of EWL Financial, who coached participants at the IFA seminar on such subjects as cash flow, collateral and credit ratings.

"If you have a credit score of 660 or higher, you pretty much can go to any bank in the area," Lawlings said, speaking to an audience that overflowed from a conference room into a hallway. "If it's lower than that, ask if they have a special program for people with scores under 660."

Most lenders will insist that franchisees back their loan with personal property and investments, and they recommend against funding the new business with credit cards.

"We want to see a business plan, a bio of their experience, a balance sheet, and if they never had another business we look for their income statements: tax returns, credit history, records of assets liability and net worth," said Andrew Nadler, senior vice president of leasing for Combined Properties, a shopping center management company in the Washington region. "We'd never want to put someone in the business and then see them fail."

Jeff Pollak, principal retail strategist for the Bethesda retail brokerage firm StreetSense, said aspiring franchise operators have to be smart about picking which business they want to do. "We know, for example, we're not going to put one more food store in a shopping center if there's already three," he said.

Swain and his partners, Timothy Fitzgerald, Curtis Leftwich and Ruston Spurlock, are betting on the fact that people working at and visiting the new Bureau of Alcohol, Tobacco, Firearms and Explosives building at 200 Florida Ave. NE will need to eat lunch. They have also gotten help from Richard Mazur, who owned and operated McDonald's franchises for 40 years, and Curtis's father, Willie Leftwich, a retired D.C. attorney.

They are following what experts suggest are keys to success in franchising, which also include good people skills and organization.

Franchisees say that good humor and a philosophical bent can also make a difference.

"How long does it take to climb a mountain?" said Will Gist, who has launched at least three Maui Wowi Hawaiian coffee and smoothie franchises in the Washington area. "When you get there, how long do you stay? It's boring to be at the top. The fun is in the journey. The fun is in the ride."

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