Unemployed Pinning Hopes On Franchise Ventures

Sunday, May 10, 2009

In the weeks leading up to the opening of her new BounceU franchise, Kim Heinz spent several sleepless nights.

"I left a job I had for 20 years to do this," Heinz said.

As an account manager at an information technology company, Heinz had a boss and her own private office in a comfortable corporate-beige building.

But the slumping economy meant less business for the firm. Heinz and her husband increasingly worried about job security.

"In this economy, the only way we felt we could secure our future was to become our own business owners," Heinz said.

She and her husband began to research different options, focusing on businesses that were kid-related. They finally decided on BounceU, an inflatable indoor play arena for kids' birthday parties and other events.

After some "heavy soul searching," Heinz made the leap and quit her job last September; mostly funding the franchise with the couple's personal savings.

"We kept saying, 'Are we doing the right thing?''" she said. "But we decided in the long run, we'd have control of our destiny." Heinz is not alone in deciding to open a franchise in a down economy.

Traditional wisdom has it that no one opens a business in a recession, but the opposite is true: Recessions typically generate spurts of franchise activity.

"Historically, franchises have continued to grow straight through the recession," said Darrell Johnson, president and chief executive of franchise research firm FRANdata Corp.

That's partly because the pool of qualified, prospective franchisees grows as people are laid off.

"Well-qualified people are getting laid off mid-career, and they decide they want to go into business themselves," said International Franchising Association spokeswoman Alisa Harrison.

Seizing control Harrison said that, after the recession of 2000-01 and the events of Sept. 11, franchising grew by more than 18 percent from 2001 to 2005, outpacing many other businesses.

"People say, 'I put 10, 15, 20 years into a company, and because they ran into some tough times, they let me go," said Ray Titus, chief executive of West Palm Beach-based United Franchise Group. "They think, 'Do I want to put myself in a position where I may get laid off again?' Instead, they take control of their future by running their own business." United Franchise Group consists of SIGNARAMA, EmbroidMe, Billboard Connection, FranchiseMart and Plan Ahead Events. Titus said that the number of people asking him for information on opening a franchise of one of those businesses is up 40 percent from last year.

In addition, in February, Titus said his company had more people buy one of his businesses than any other month in the last two years.

"Think about it: it's a great time to open a business right now," Titus said, explaining that there's good available real estate on the market and a lot of potential employees to choose from.

But even Harris tempers his enthusiasm.

"There is risk, owning a business. Even in good times, people fail." Further, this recession also comes with a credit crunch, meaning that prospective franchisees are finding it harder to secure lending needed to start their own business.

"This is the first downturn we've had that's been driven by capital access," Johnson said. "Banks are driving the downturn this time around, so we'll have to see what exactly that means for franchises." In fact, while a report released by the IFA showed that the number of franchise establishments has been growing in the last several years - from 808,000 in 2006 to more than 864,000 in 2008 - the economic slowdown is expected to take a toll on the franchise sector.

The IFA predicts that the number of franchise locations is expected to fall 1.2 percent in 2009 - the first decline on record. And, according to information from FRANdata, borrowing by franchises is expected to fall by about 27 percent in 2009 compared with the previous year, as existing franchises limit expansion and new establishments have more trouble securing funding from reluctant lenders.

Since it can cost anywhere from $25,000 to $1 million to open a new franchise, the lack of willing lenders means that prospective franchisees may have to pull money from their savings, severance packages or 401(k)s to get their business off the ground.

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