Credit Crunch Dents Interest In Franchises

Karen Strickling had just heard the pros and cons of running a franchise and the specific costs and benefits of buying a Planet Smoothie. After sampling one of the chain's frosty health drinks flavored with acai, a palm berry, she pondered the prospect.

"I like what I hear," she said. "I've got to see hard numbers, but I'm leaning very heavily towards it." The 44-year-old Suwanee resident had just gone through a three-hour information program called Franchise U put on by Petrus Brands, the Atlanta-based owner of Planet Smoothie, a retail chain with about 125 shops in the U.S.

Franchisors are pressing their search for qualified candidates. With business loans harder to come by due to tight credit markets, many would-be franchisees have been unable to borrow and buy their own franchise.

Industry experts expect the credit crunch to continue, thwarting some franchise purchases. Observers say this comes at a time when interest in franchising is normally high because of the poor economy and limited corporate job prospects.

"It's a time when people's entrepreneurial spirit rises up," said Planet Smoothie president Bret Eldridge. "We think it sort of rouses the American spirit. People are looking for some kind of control." Control over their lives after layoffs, buyouts and uncertainty, that is. For some people, franchising is considered an easier entry point into self-employment because the franchisor offers a formula to operate the business. It has been referred to as "entrepreneurship with training wheels." Franchise start-up costs vary widely, depending on the business and location, with some requiring investment of less than $10,000, and others near $1 million. Franchisors typically require the franchisee to have a specified net worth as well as liquid assets. Expenses include a franchise fee, building furnishings, inventory, equipment and insurance.

"We've always seen franchising do well in recessionary times and in tough economies as people are laid off or need to find another career option," said Alisa Harrison, spokesperson for the International Franchise Association in Washington.

"We certainly expect that to happen this time, but probably at a slower pace because of the credit situation." Jeff Elgin, founder and CEO of FranChoice, a company that matches prospective franchisees with franchisors, said the number of people searching for franchising opportunities declined beginning in the second half of 2007, when the economy was still booming. He said that's probably because people had become complacent due to high-paying jobs and growing 401k plans and weren't looking to change careers.

The decline continued through last year, perhaps because tighter credit stifled interest, so the prospect pool in 2008 was only half what it was in 2006, Elgin said.

"Normally, during a decline, you'd see a very large resurgence in interest," Elgin observed. "But this time, with the credit crunch, it's really unique." Many qualified people, he said, "are having a Dickens of a time." Strickling sold some beachfront rental property and that would help her pay for a franchise. "Otherwise," she said, "I think it would be a struggle." Strickling said the timing is right for her to go out on her own. The former high school math teacher has the funds, and her children are older, requiring less time.

Planet Smoothie got her attention because she believes healthy products are a trend that's here to stay.

"I hope," she said, "to catch that wave."

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