Don Boroian - Franchising and The Economy

In November, Francorp's Chairman, Don Boroian, did a presentation on the economy and its effect on franchising. Here is the transcript from that presentation and what was said about how franchising would be affected by our current economic downturn.

Hi, I am Don Boroian, Chairman of Francorp. I’d like to talk to you today about a couple of things that are very important to us as we meet this challenging economy right now that is raising havoc with a lot of the financial markets. It will definitely have an effect on franchising as well. However, contrary to what you might think, it is going to have a positive effect. For example, the biggest growth of franchising has occurred during these downturns in the economy. And we are going to look at it in two ways. First of all, why it makes sense, for you as a franchisor to expand during this particular time. And secondly, why you need to change your message to prospective franchise buyers to meet the economic perceptions that people have about whether or not it is a good time for them to buy a franchise.

First of all, as a franchisor, there’s a lot of uncertainty in the market. Many companies, right now, as they hear all of the economic woes and credit issues and so on are pulling in their horns. They’re not expanding, particularly companies who are looking to expand with borrowed money or looking for investors to open operating units. First of all, we all know that investors don’t invest in companies to open ten stores. The return on investment to venture capitalists is not sufficient to justify that kind of investment. They don’t want to be in a situation where their money is tied up for three or four years before they begin to turn a profit. By the time you open operating units and put managers in them and the amount of return on invested capital at the unit level, which generally, is about fifteen percent, has to be split between the investor and you. It’s just not a sufficient amount of money. In addition, during times like this, investors are investing their money in distressed merchandise. Depleted value of stocks are a bargain for investors. And the money from the venture capital people is not going into start ups or development into relatively new companies. However, there’s a silver lining to all of this. And that is, that as a franchisor, your ability to move out into the marketplace is going to be enhanced by the availability of opportunity for you. For example, if you are in retailing or in restaurants or any business that needs to go into a shopping center or into inline stores, there are going to be more vacancies in areas now that you might not be able to get into when times are good and business is booming. Those stores were already filled. Right now, some of those stores will become available. Even though you may not have the capital to go into those stores personally, this is where franchisees come in. And while we hear all the talk about credit and difficulty in getting credit, remember, we’re dealing with a different buyer. For example, if you have a retail store or if you have a restaurant, you need hundreds of customers to come into your store, every day, every week.

But in franchising, we don’t have to sell hundreds of franchises every week or every day or every month. We only need to sell one or two, certainly, in a time like this, if you’re a new emerging franchisor. And the people that you’re going to be selling franchises to are more abundant now in quality. These are people that are being laid off, downsized, reengineered in companies that are laying off people or are going out of business. And these are the people that have been working in these companies for a number of years. They have good credit. They have a high credit score. They have equity in their homes; that can get refinanced at their local bank because they have longevity in their community and they are very good credit risks. In addition, these are people that have excellent job skills. Many of them are middle managers. These are people that always really would’ve liked to own their own business; were afraid to leave the job and risk their fortunes on starting a business. But now that, that decision has been made for them, they’re on the market. And many of these people have gone to job interviews only to find that companies in their same industry, that have just laid them off, are also laying off people. That’s when we get their interest in buying a franchise.

So that from your standpoint, as a franchisor, there are going to be a lot of opportunities because your competitors that are not franchising, are not going to be occupying more stores, borrowing money, opening more branches, opening more markets for their businesses. A good case in point right now is Starbucks. They’re closing 700 of their stores. Now for Starbucks, to put a manager in an outlet and to make the entire investment in the store and to be able to make a profit over and above the manager’s salary, is quite different than for a franchisee who is to buy a franchise and go into a business and work 60 hours a week. In many cases just making their salary, without even a profit over and above that, meets their needs. They just want to own their own business, be their own boss, be the captain of their own ship, master of their own destiny. And so many of these kinds of situations or companies that have corporate owned locations; those locations are going to be available. In retailing, in the food service industry, in anything that occupies a store, where someone has already done the leasehold improvements, in the restaurant business they have the walk in coolers, freezers, 3-compartment sinks, and grills and so on. And many of the landlords are bending over backwards giving free rents to get tenants in there to occupy these spaces. And in the service business as well, many of your competitors, those of you in service businesses; these companies are going to be cutting back on their expansion because it takes capital and not only just the start up capital but the burn rate. When we sell a franchise, a franchisee doesn’t expect to make money for the first two years. If they just barely take out a salary initially, to get the business going, that’s pretty much expected. They don’t expect to walk in on day one to be turning a salary and a profit.

But companies today can’t afford to do that if they’re borrowing a lot of money at their banks because, first of all, the bank financing isn’t available to that extent. And certainly, as the credit markets and standards tighten, it makes it more difficult for companies to expand with company owned units, where typically it takes two years to get to a breakeven point. And so those of us that are franchising our businesses have a great opportunity here because our competition is pulling in their horns.

You have three choices right now in this current challenging market. Number one, pulling your horns, hunker down, climb in a fox hole, wait until the storm blows over. If you do that, you’re going to miss a lot of opportunities. But companies that need capital in order to expand their own company owned units are going to have to do that because they don’t have the available capital.

A second strategy is to do what you’re doing right now. Just keep on going and keep on your current expansion strategy. But again, companies that are doing this with their own company units are inhibited by the inability to get capital and by their inability to move out into other markets and support these kinds of expansions.

A third option and this is an option great for franchisors, because this is an opportunity to look around and capture markets that are being abandoned or not expanded into by your competitors. And by franchising, you’re allowing yourself to go into these markets with the capital resources and the human resources of others. So from your standpoint, as a franchisor, this is the time to move out. And as we talk to prospective franchisors whether it’s through our regional director program, whether it’s through the people who contact us, whether it’s the seminars that we do, or the advertising that we do, and we talk to companies who are considering franchising. And looking at this as an optional strategy, we’re quick to point out to them that now is the time to expand your business into a market that’s weakened.

The time to attack the fort is when the walls are crumbling. And the walls in many of these companies today, which were well fortified, are crumbling because they are reliant totally upon bank financing that isn’t going to be there to the extent it has been in the past. And as franchising affords you the opportunity to expand, it does so by you finding those one or two or three people each month who do have good credit, high credit scores, who are looking to own their own business, who will make that investment, who will be the human resource solution for you as well as a capital solution, as they invest in buying the land, building the business or developing their markets. And it gives you the opportunity to move into a market that is weakened. This is the time. The lions in the Serengeti always attack the weakest of the prey. And this is the time for us to move into the marketplace by franchising into these markets while the companies that are reliant totally on expansion capital in either internally generated, borrowing money, bringing in investors or through other means. And we have an added opportunity here to raise funds through the investment of individuals. And we don’t have to get 300 of them a month or a hundred a day.

We only need to get 2 or 3 or 4 people to buy a franchise each month. These are people with good credit. These are people with equity. These are people with 401(k)s. These are people with savings. These are people with family and friends that will help them get started. So, take advantage of this opportunity now. And from the franchise buyer’s point of view, let’s take a look also at why we need to adjust our message. In the past our message was be your own boss, be master of your own destiny, captain of your own ship. Now is the time to get into this expanding world of whatever your concept is. But that message is changing now because now people have a perception that this may not be a good time to go into their own business. Because you know already how to run that business, they’re getting a jump start. And so this is an opportune time for you to look over the marketplace at a much better qualified group of people, who are desperately seeking either a job, which is very difficult to replace, similar to the one they’ve had or to start their own business. And because these are not people that are high risk, they’re not as likely to start their own business from scratch because they know the rate of business failures is about 95 percent of all new businesses that start. According to the Department of Commerce 95 businesses, 95 percent of all start ups from scratch fail within the first 5 years. And so with a franchise, the odds are in their favor and these are people who are more conservative, who are comfortable following the plan. And now that decision has been made for them, that they’re out in the marketplace without a job, they’re taking a look at you, as a franchisor, and what you offer. So what we can tell the prospective buyers today is that we have a system, we have it worked out. We have a complete business model. We have the opportunity for you to learn. We will teach you everything you need to learn. You don’t have to know anything about our business. We’ll teach you, we’ll help you. There are available stores now. There are landlords that are giving free rent and doing leasehold improvements and tenant improvement allowances.

There are competitors that are on the ropes, some of them going under. Now is the time to buy a franchise, to get yourself established, to get yourself started with our assistance as franchisors helping you. Now is the time. So don’t hunker down, don’t crawl in the fox hole. Now is the time to move out. Take advantage of the weakened economy, the weakened market, your weakened competitors. Sell these franchises and help people get started. And show the prospective buyer why now is a good time for them to capitalize on this opportunity that this challenging economy has presented.

Don Boroian
Chairman
Francorp, Inc.
www.francorp.com