Allison Landa writes at NuWire Investor that the global recession is putting franchisees in that classic spot between a rock and a hard place.
According to Charles Miller, a shareholder and director of San Francisco-based law firm Bartko, Zankel, Tarrant and Miller, a variety of factors are putting the squeeze on franchisees. “They have an obligation to pay royalties, franchise fees, regardless of how they’re doing,” he says, adding that those fees are typically based on sales volume. “That could put a crimp in things if business is down and expenses are going up.”
Add in the fact that many franchisors are cutting back on services, and franchisees are feeling the pinch from both sides. “It’s one of those damned-if-you-do, damned-if-you-don’t situations,” Miller says. “If you hold back on your royalties, the franchisor is obviously not making any money and is not going to provide the services.”
Recession Hits Home
Statistics reported by the Rosenberg Center Franchise 50 Index, which is produced by the University of New Hampshire’s Rosenberg International Center of Franchising and is a similar model to the S&P 500, suggest that growth amongst franchisees outstrips the economy as a whole. However, those numbers also indicate that franchising is currently suffering along with the rest of the U.S. economy.
The Rosenberg Index follows the top 50 U.S. franchisors, who in turn represent 98 percent of the market capitalization of public franchising businesses. From 2000 to 2008, it increased 59.6 percent as opposed to the S&P 500, which declined 8.2 percent. The two indexes grew far closer during the first two quarters of 2008; the Rosenberg Index dropped 12 percent, while the S&P 500 slid 12.8 percent.
“Just like everybody else, I think, franchise businesses are not immune from this happening,” Miller says. “Franchising has its challenges. I’m sure that franchisees would like a break on their royalties on the one hand, and on the other hand, that also tends to probably cut off the services.”
With all that said, however, Miller still sees a silver lining with regard to franchising in the recession. “There is a tremendous infusion of new blood available for franchisees because of laid-off executives or people who get a big severance package and want to go into business,” he says. “Also, we have our veterans coming back, which has always been a pool for franchisees, and there’s just an enormous amount of people now who find franchising attractive and have the ability and the means to get in because of their severance packages or early retirement buyouts.”
This means good news for franchisors, who have a far more eager and motivated crop from which to choose. “Now franchise companies can really cherry-pick, and really have a much better and more eager group of people who want to work.”
Read more at NuWire Investor