The Road To Success? Franchises Often Seen As Good Way To Get A Start

Ian Swain lies awake at night thinking of the costs he and his partners face for the two franchise restaurants for which they just began construction.

Their location in Northeast Washington is "the hottest corridor of real estate in town," he tells himself, which is helpful to think about, considering the $250,000-plus they are shelling out for the side-by-side Heidi's Brooklyn Deli and Sister's Pizza and Mussels that they plan to open this summer.

He began his first business, Candy Man Enterprises, selling snacks from a duffel bag at a local high school. After college, he dabbled with friends in small development deals, and then real-estate management. Today, Swain, a 32-year-old husband and father of three young boys, says he thinks that he has found a way to reduce risk and boost his chances of success by buying franchising rights from a company he believes is a winner.

According to a recent PricewaterhouseCoopers study, the franchising sector accounts for 18 million jobs in the United States and $1.5 trillion in annual economic impact. And the rate of employment growth in franchises, which number more than 760,000, outpaces the overall economy, the study said.

Franchises are often seen as a good way for newcomers to start a business. For a fraction of the capital it would take to begin a business from scratch, franchisers can build one that comes with a basic road map. (Panera teaches you how to make the sandwiches. It's up to you to get the show up and running.) But it's not a guaranteed route to success. In franchise-driven industries - restaurants, hotels, motels - failure rates are significantly higher than in others such as technology and equipment, said Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University in Cleveland and the author of The Illusions of Entrepreneurship.

Now is a particularly tough time to begin a business, with fuel and material costs up and more Americans cutting back on discretionary spending.

Nevertheless, last week more than 140 aspiring entrepreneurs gathered at the University of Maryland to hear bankers, developers and business executives explain how temp services and copier cartridges could be the keys to securing their economic futures. At the daylong seminar for women, minorities and veterans, sponsored in part by the International Franchise Association, would-be franchisees were told that if they researched their options and picked their business and location well, they could capitalize on the fact that commercial rents have fallen.

Over the years, the franchise business has attracted relatively few minorities. About 6 percent to 9 percent of the franchises in this country are owned by blacks, Hispanics, Asians and American Indians, according to the International Franchise Association Education Foundation.

A host of studies and surveys points to obtaining capital and business support as primary barriers for female and minority entrepreneurs. Although the number of minority-owned businesses has risen in recent years, with such groups as the National Association of Black Hotel Owners, Operators and Developers reporting a twentyfold gain in their ranks, research suggests that discrimination has made it difficult for minorities to venture beyond small-scale retailing and personal services.

Timothy Bates, an economics professor at Wayne State University in Detroit, said in a study last year that many programs designed to assist minority business executives "generate little entrepreneurship because they relegate minority firms to overcrowded, low-growth lines of business." A separate study by Bates said that limited access to capital may be one of the greatest challenges for minority business entrepreneurship.

Lenders are inspecting prospective franchisees' finances with a more critical eye these days and will demand a signed lease, or at least a letter of intent, before approving a loan, said Edward Lawings, the president of EWL Financial, who coached participants at the IFA seminar on such subjects as cash flow, collateral and credit ratings.

"If you have a credit score of 660 or higher, you pretty much can go to any bank in the area," Lawings told an audience that overflowed from a conference room. "If it's lower than that, ask if they have a special program for people with scores under 660." Most lenders will insist that franchisees back their loan with personal property and investments, and they recommend against financing the new business with credit cards.

"We want to see a business plan, a bio of their experience, a balance sheet, and if they never had another business we look for their income statements: tax returns, credit history, records of assets liability and net worth," said Andrew Nadler, a senior vice president of leasing for Combined Properties, a shopping-center-management company in the Washington area. "We'd never want to put someone in the business and then see them fail." Jeff Pollak, the principal retail strategist for StreetSense, a retail-brokerage company in Bethesda, Md., said that aspiring franchise operators have to be smart about picking which business they want to do.

"We know, for example, we're not going to put one more food store in a shopping center if there's already three," Pollak said.

Swain and his partners - Timothy Fitzgerald, Curtis Leftwich and Ruston Spurlock - are betting on the fact that people working at and visiting the new Bureau of Alcohol, Tobacco, Firearms and Explosives building nearby will need to eat lunch. They have also gotten help from Richard Mazur, who owned and operated McDonald's franchises for 40 years, and Curtis' father, a retired lawyer.

They are following what experts suggest are keys to success in franchising, which also include good people skills and organization.

Franchisees say that good humor and a philosophical bent can also make a difference.

"How long does it take to climb a mountain?" asked Will Gist, who has started at least three Maui Wowi Hawaiian coffee and smoothie franchises in the Washington area. "When you get there, how long do you stay? It's boring to be at the top. The fun is in the journey. The fun is in the ride."

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