Small Business

Franchises Getting Upper Hand
Over Independents

It's a trend that economic hard times are accelerating, as franchisees snap up hard-to-get financing.

By Jonathan N. Crawford, Reporter, the Kiplinger letters

January 28, 2010

Franchises are making gains on independents, especially restaurants. By 2013, franchise eateries -- fast food outlets, family sit-down places, etc. -- will outnumber all others.

From 2000 to 2008, the number of franchise restaurants grew by 20%, while the number of nonfranchise restaurants fell by nearly 4%, according to data compiled by NPD Group, a retail market research firm. Deflated consumer spending and crimped credit could even accelerate this trend, nudging more independent restaurants over a cliff.

“Franchises have been far from insulated from the recession, but overall they have performed better,” says Jonathan Maze, an editor at Franchise Times, a trade publication.

On the whole, franchises will outgrow their nonfranchise rivals this year. They’re typically better positioned than mom-and-pop shops to survive downturns, benefiting from a strong brand presence, corporatewide marketing campaigns and access to advice and mentoring from the franchisor. Plus they can often offer customers -- and get from suppliers -- steeper price discounts.

In fact, 60 new franchise brands were added in the last quarter of 2009, while many other small businesses suffered. “Given the big drop in the economy in ’09, these numbers are pretty good,” says Darrell Johnson, president and chief executive officer of FRANdata, an independent research firm that also administers the Small Business Administration’s Franchise Registry.

Moreover, lenders may be less tightfisted with franchise owners than with nonfranchise owners. Odds are that this year one in every five dollars of SBA guaranteed loan money will go to a franchise business, Johnson says.

Lenders have “a slight bias toward franchises,” he says. “Generally, bankers tend to perceive franchises as less of a risk. There’s a greater willingness to lend to them,” Johnson says, adding that loans to franchisers also tend to be larger compared with loans made to independents.

The overall economic output of franchise businesses is expected to rise 2.8% this year, versus a decline of nearly 1 percent in 2009. The biggest gains will come from personal services, quick service restaurants and business services, according to a report by PricewaterhouseCoopers for the International Franchise Association (IFA).

The franchise sector has been expanding at a faster pace than the overall business sector in recent years. From 2001 to 2005, economic output of franchised businesses grew by over 41%, from $625 billion to $881 billion, while the economic output of all businesses grew by 26%, from $16 trillion to $20.1 trillion, the IFA report shows.

“Networked businesses tend to recover at a faster pace than other businesses and tend to sustain businesses more effectively than nonfranchised businesses,” says John Reynolds, president of the IFA’s Educational Foundation. “Franchises have support systems -- ways of doing business more efficiently in a way that independents do not have.”

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