McDonald’s, Valpak, MaidPro, Lawn Doctor. At the moment, there are 230 types of businesses in the U.S. that you can enter by buying a franchise.
Franchised organizations operate more than 850,000 retail units in the U.S., according to the Franchise Business Economic Outlook report by PricewaterhouseCoopers, and in 2008 these generated $839 billion in sales. The report, prepared for the International Franchise Association’s Educational Foundation, says that throughout this decade franchises expanded, with the number of units growing an average of 5.6% per year between 2001 and 2005.
However, like the economy that nurtured them, franchises have taken a hit. This year, according to the report, the franchising industry will see a decline in number of businesses, jobs, and output. The study also says that, overall, the total number of franchise businesses is expected to decrease by 10,000 units, or 1.2% of the total, in 2009, and that sales by franchised businesses are expected to drop by more than $4 billion.
The report attributes this decline “in part, on the unfolding credit crisis.” More specifically, according to executives at franchise companies, it’s much more difficult for aspiring franchisees to come up with the funding to get started. Loans, once easily obtained, now require excellent credit scores and substantial collateral. The result is that some franchise operations see fewer entrepreneurs looking to stake all on buying a franchise. Doug Dwyer, of DreamMaker Bath & Kitchen by Worldwide, a remodeling franchise in Waco, Texas, says that he began to notice diminished interest two years ago, that is, right after housing starts (2005) and annual remodeling sales (2007) had peaked. A little less than a year ago, he says, “It really started affecting us.”
Not only do aspiring franchisees have a harder time getting financing, but right now many existing remodeling businesses — DreamMaker’s biggest target market — “don’t have the money to do it right,” Dwyer says. In home improvement–related franchises, startup costs can range from $20,000 for a grout and tile franchise such as Grout Medic to $250,000 for a steel siding or concrete repair franchise, where special equipment is required.
Sales for all kinds of businesses are down, due to a sharp drop in consumer spending, so existing businesses that might want to build a niche operation around a franchise often don’t have the capital. It is also more difficult to find homeowners interested in investing in big-ticket home improvements, especially if those projects involve borrowing the money to pay for them. “Our biggest challenge in the last 12 months,” says Peter Allen, vice president of national sales for Four Seasons Sunrooms, “is the ability of the franchisee to generate leads at the local level.”
Niched In
Though all remodeling-related franchises combined—somewhat more than 12,000 units—constitute just a small fraction of the 530,200-plus U.S. businesses that the Census Bureau and the Joint Center for Housing Studies of Harvard University classify as "remodelers," they are still more plentiful and are more well-known than ever before.
Credit much of that to the Internet. Companies such as Case Handyman, Re-Bath, or Owens Corning Basement Finishing System give newcomers, with or without construction experience, a way to get started. And the Internet is often how prospective franchise owners first find out about these business opportunities, executives say.
Franchises that involve some kind of improvement to the home are many — 50 plus — some of them quite large. They range across a broad spectrum of products and services. The biggest, in terms of numbers of franchised units, are the insurance restoration/cleaning operations such as ServPro, ServiceMaster Clean, and Paul Davis Restoration. Next in number come home-inspection franchise companies such as Pillar to Post, BrickKicker, and AmeriSpec, followed by handyman companies — Case Design/Remodeling handyman division, House Doctors, Mr. Handyman — which bring branding and business discipline to the short-cycle home repair or minor remodeling job.
Increasingly franchises have come to include specific skilled trades, such as plumbers (Benjamin Franklin Plumbing, Rooter Man, Mr. Rooter Plumbing) and electricians (Mr. Electric, Mister Sparky). A handful of home improvement franchise companies — for example, ABC Seamless, a steel siding franchiser out of Fargo, N.D., and Four Seasons Sunrooms, based on Long Island, N.Y. — have been around for 20 years or more. Franchising has become “visible” in the remodeling industry, Dwyer says, and the companies that have been around for a while have stronger, time-tested systems.
Still, many companies only began actively franchising after 2000. When Fresh Coat, a painting company headquartered in Cincinnati, launched its franchise program in 2004, “there were only two other franchise painting companies,” says founder and president Ralph Martin. “Now there are four or five.” Numbers have swelled in several kinds of home improvement franchises.
“If you look at the number of franchisers in the home improvement industry, it’s at least five times as many as it was 10 years ago,” says Mark Richardson, REMODELING columnist and co-chairman of Case Design/Remodeling, which operates a handyman division with 50 franchisees. Richardson says that the many new companies offering franchises do something different from what franchisers did 10 or 15 years ago. The new companies focus on one product or service, rather than trying to do it all. “That’s where franchising in the remodeling industry works best,” Richardson says.
Willing to Learn
For aspiring business owners, the attraction of a franchise is twofold: they’re in charge, and they have the chance to make a lot of money. To succeed, they need determination, business skills, and investment capital. “The ones who flourish are entrepreneurial marketers,” Allen says. Successful Four Seasons dealers “know how to generate leads.”
But, in addition, those aspiring to own a sunroom franchise usually have some level of construction skills. "They come from a home improvement or construction background of some sort,” Allen says. “Even architecture or engineering. They’re people who understand three-dimensional structures.”
For other franchise organizations, the ability to market, sell, and manage a business supercedes construction knowledge. Willingness alone is all it takes. But it takes a lot of willingness. Martin says that he doesn’t want franchise owners out there wielding a paintbrush. He wants them at the Chamber of Commerce meeting, wielding a BlackBerry. Building up the web of contacts and connections that in turn generate a steady stream of new business is the most difficult thing for new owners of a Fresh Coat franchise to learn. If they’re willing to learn it, they can be successful, no matter what kind of background they come from. “We have cops as well as people who owned a business before," Martin says. "Right now we’re seeing some folks from the automotive industry. Bottom line is … they want to make a lot of money.”
And they can do that, he argues, because a franchise puts marketing, selling, and production systems in place that might take an independent startup years to establish and perfect, if it ever masters them at all. “Our business systems are geared to rapid launch,” Martin says. That means four to six weeks after signing the franchise agreement.
Onboard When the Economy Turns
Remodeling businesses are notoriously short-lived, in part because barriers to entry are so low. A consequence is that many remodeling company owners never master the financial, marketing, or selling aspects of the business and soon find themselves overwhelmed and out of business. It’s for that reason, Richardson says, that franchises are more likely to succeed at making a profit and sticking around. “The thing people have to think about, right now when so many businesses are struggling, is: How does the failure rate of a franchise compare to a non-franchise? And from what I can see, the franchise failure rate is much [lower] than [the failure rate] for non-franchised businesses because franchises are not out there by themselves.”
Some franchise executives say that although it is currently far more difficult to get the money to buy and operate a new franchise, they’re seeing as many interested parties as they ever did. Dave Adams, vice president of marketing for Concrete Raising, a concrete repair franchise based in Wisconsin, says that interest in the company is high. With unemployment approaching double digits, many middle-aged middle managers who suddenly find themselves without jobs are casting around for a business that will provide them with an income and a level of control they wouldn’t enjoy if they were working for someone else. “But the financial and credit lending institutions have tightened the strings so much that it’s difficult to put a franchisee into place,” Adams says.
Where to From Here
For companies such as Four Seasons Sunrooms or ABC Seamless, the trick is finding ways to help existing franchises stay healthy and profitable through the downturn. And both have elected a similar strategy: giving those franchisees new products to sell.
For Four Seasons, it is patio covers, pergolas, and a new line of windows custom-manufactured with a different glass package for local climate conditions. For ABC Seamless dealers, it’s a new line of horizontal metal roofing, made on the jobsite, the way the company produces its siding jobs. That, points out founder and CEO Gerald Beyers, will enable ABC Seamless, always strong in the Upper Midwest, to increase sales without having to add franchise dealers. “We have to utilize the marketing base we’ve already established,” he says.
Dwyer says he believes that in spite of their woes, franchising organizations may be doing better than independent remodelers “because we have a marketing and selling system. But when things get cut as hard as they have or foreclosure rates are as high as they are, everybody’s going to be feeling it.” That said, he believes that the worst may be over for franchising organizations. “I think the loss rate should be slowing down for most companies.”
—Jim Cory is editor of REPLACEMENT CONTRACTOR, a sister publication of REMODELING.