Is franchising in a funk? Well, if the state of Washington is typical, it might well be that franchising is hurting right now. According to a report on HeraldNet.com (the Web site of the Daily Herald, a newspaper that covers two counties in Washington) new franchise registrations between May 2008 and May 2009 declined 19 percent in the state, based on data from Washington’s Department of Financial Institutions. That translates to 320 fewer franchise companies registering to sell franchises in the state.
Jiffy Lube, Gold’s Gym and Cold Stone Creamery were among the companies that didn’t file to sell new franchises in Washington state in that time period. Brad Ferber, a securities examiner for the Department of Financial Institutions, says the trend is to be expected in the recession: “Like all businesses, they’re pulling back.”
That’s typical behavior for franchisers in an economic downtime, when shrinking profits often means halting expansion. Marketing and training budgets — two costs typically footed by franchisers — are slashed, and many companies pull back, curbing sales in certain regions and putting a hold on business sales in some states.
A franchise company that’s not registered in a state can still do business with its existing locations in the state. However, it can’t sell new locations or open new locations sold prior to that year. Franchise companies whose net worth is less than $5 million or that have fewer than 25 franchise locations must register with a state’s Department of Financial Institutions. Bigger franchises are exempt from the registration process, but still have to file a document showing they plan to do business in the state. HeraldNet.com reports that the number of exempt franchises filing in Washington state declined as well, to only 149 (a 34 percent drop) between May 2008 and May 2009.
The sad part of all this is that with so many Americans losing their jobs and turning to entrepreneurship, now is the time franchising should be growing. After all, franchising offers many advantages for new business owners, especially those from a corporate background. In past recessions, franchising typically grew. Not so this time.
What accounts for the difference? Many in the franchise industry say it’s the tough lending climate. The International Franchise Association (IFA) predicts the number of U.S. franchises to drop by 1.2 percent this year–the first such decline in more than 10 years. The IFA contends the credit crunch is the reason for the drop; it projects that U.S. franchisees will borrow 27 percent less this year than last year.
People ready to start businesses—and franchises eager to sell them those businesses—is a combination that, by all rights, should spur lenders to act, not to sit on their hands. That’s why the IFA’s President and CEO Matthew Shay recently testified before the U.S. House Small Business Committee in favor of larger limits on SBA loans.
“Larger loan limits will enable franchise small-business owners to expand into new markets and help create between 450,000 to 650,000 new jobs within the next 12 to 18 months,” Shay stated. The testimony was part of the IFA’s efforts to get federal stimulus money to the franchising industry and to improve SBA lending. And today President Obama asked Congress to increase the size of the caps for small business loans—up to $5 million for 7(a) and 504 loans and announced a plan to spur lending to small businesses.
Visit the IFA site to get more information about the organization’s efforts—efforts that I hope will pay off.
Rieva Lesonsky is CEO of GrowBiz Media, a content and consulting company that helps entrepreneurs start and grow their businesses. Follow Rieva on Twitter @Rieva. Visit SmallBizDaily.com to read more of Rieva’s insights on small business and to buy her newest book, Startup 101: Quick Tips for Starting a Business.