Franchises
2:26 pm
Mon August 6, 2012

Hit By Recession, Franchising Hopes To Bounce Back

Franchised companies have been through very tough times, just like other small businesses during the recession, but some are betting they have what it takes to make a quicker recovery. WNPR’s Harriet Jones reports.

This is Connecticut’s latest Wireless Zone location, in Cromwell, and it’s the grand opening day. Co-owner Matt Pensiero says for him, the cell phone business is a smart place to be.

“Maybe ten years ago it was kind of a toy, kind of, you know, something nice to have; but now, it’s a have-to-have.”

For Pensiero and his brother in law, Bill Murphy, this is their third Wireless Zone franchise – they own others in Middletown and East Hampton. But the two didn’t begin their business career in a franchise – they also own a standalone small business called Attention To Detail.

“We go to car dealerships, we sell them accessories. Like if the customer comes into the car dealership and they like the red Camry, but they want leather interior. We would convert the cloth interior to leather, we would add power sunroof or whatever accessory the customer wanted.”

But the two decided that in order to recession-proof their enterprise, they had to diversify.  They had some initial false starts in buying other franchise businesses, but Wireless Zone was the one that stuck.

“The cell phone game, you can’t do it sole proprietor, you need support. It’s too big a business, there’s too many legal aspects of it, there’s too many things that change. And if you want to be a player, you have to hook up with someone like Verizon, and you can’t hook up with them without support.”

They opened their first Wireless Zone location in 2005. And found that being a franchisee is a bit different than running your own show.

“It was kind of a transition for us, because we weren’t really used to how the franchise set up works. You know, when you’re a sole proprietor, and you’re used to the money and handling everything on your own, it’s kind of difficult to hand someone else over money.”

What counts though, is who you’re handing the money over to.

“We’ve had experience with bad franchises.

Yeah, we have!

You know, it made us a little leary about the franchise business, but after being with Verizon, we know how it’s supposed to work. It’s a partnership. They can’t do it without us and we can’t do it without them.”

Wireless Zone itself began in 1988, as a successful small business in Wethersfield, originally called The Car Phone Store. It now has almost 500 locations. Dave Harries runs the New England territories for ATI, Wireless Zone’s parent company. He says Pensiero and Murphy are the kind of candidates a franchisor looks for.

“The skills that these gentlemen picked up in their own business is something that carried over into where they are today.”

That relationship between franchisor and franchisee is critical and sometimes tricky. Franchising a business is highly regulated at the state and federal level, and turning a business into a franchise can be legally complex. In fact there’s a huge amount of legal disclosure required of the franchisor when signing up a new franchisee.

“It’s a lot, quite a tome!”

Bethany Appleby is a franchise attorney at Wiggin and Dana in New Haven. She says sometimes, a certain level of legal complication can just seem like the cost of doing business for a franchised business.

“Because I’m a litigator, I tend to see the litigation when it arises, but it seems fairly inevitable that if you’re a successful franchisor, you have locations throughout the country, you’re doing to see some sort of litigation.”

And what’s the most contentious item between franchisors and their network of businesses?

“It’s royalty payments, and a struggling franchisee who either chooses not to pay royalties because they’re unhappy in some way with the franchisor, or can’t pay royalties.”

Fights over territory and the cost of maintaining a franchise to the company’s specifications are also items that frequently make it into court. And Appleby says she’s seen some other interesting developments as the recession has squeezed franchisees.

“Sort of spate of cases where people who claim to have either lent or given money to the franchisee will come out of the woodwork and sue the franchisor, claiming some sort of rights.”

That’s because the credit crunch was a critical event in the franchising world. A successful big name franchise can cost hundreds of thousands of dollars in initial fees, and many would-be franchisees haven’t been able to get bank loans to set up in business. It’s left them turning to friends and family who can later prove to be a legal headache for the franchisor. Steve Caldiera is CEO of the International Franchise Association, the industry’s Washington DC trade body. He says right now the lending crisis is the biggest challenge facing the industry.

“There is still an 18% lending shortfall, nearly $2 billion, to meet the forecasted demand in 2012. Which is why we’re continuing to educate the lending community on the importance of the franchising industry in the nation’s economic recovery.”

The number of franchise units in the U.S. is expected to grow this year by almost 2% – the first increase since 2008. The sectors leading that recovery are fast food, healthcare and lodging. Caldiera says there’s a reason these businesses are coming back despite the lack of funding.

“If you look at the demonstrable growth of franchising over the last decade, 40%, it’s actually outgrown non-franchise businesses by 14% and I think it’s due to that very proven, scalable model where you get support from the franchisor.”

And with continuing high unemployment, many prospective franchisees are looking for exactly that opportunity.

For WNPR, I'm Harriet Jones.