Recession wasn’t kind to franchises in Washington state.
Franchises crashed into a front-line battle with economic forces — and retreated.
Franchise registration with the state Department of Financial Institutions dropped by 19 percent as the economy entered recession. About 320 fewer franchises registered between May of 2008 and May of this year than in the 12 months before, according to state data.
“Like all businesses, they’re pulling back,” said Brad Ferber, a securities examiner for the Department of Financial Institutions.
That means some franchise companies, such as Jiffy Lube, Gold’s Gym and Cold Stone Creamery, didn’t file to sell new franchise locations in the state that year.
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.
“It’s kind of a rough economic time, and that can put strains on franchise systems.” Ferber said.
A franchise company that isn’t registered can still conduct business with existing stores in the state, but it cannot sell or open a new location.
Franchises with a net worth of less than $5 million or fewer than 25 franchise locations must register with the state Department of Financial Institutions.
Franchises that meet those qualifications are immune from the regular registration process under the “big-boy” exemption. But they still must file an exemption document indicating intent to conduct business in the state.
Exempt franchises that filed with the state — made up of companies such as Pizza Hut, Krispy Kreme and Pinkberry— tapered down to 149 between May 2008 and May of this year. That’s a 34 percent decline from the year prior, when there were 226 franchises that filed forms.
Nonexempt franchises showed a more modest decline of 17 percent, with 1,176 registering in the one-year period running from May 2008 to May of this year, compared with 1,419 in the previous one-year period.
Jean Hales, president of the South Snohomish County Chamber of Commerce, said she’s heard anecdotes from franchise owners who have struggled to turn a profit as consumers scale back spending — but that’s not a trend that’s specific just to franchising.
“I would assume new business in general is down, not just in franchising,” she said.
John Niemi, owner of a FastSigns franchise in Lynnwood, said his company faced all the challenges any other business would.
He’s owned his franchise since 2004, and saw sales slump 12 percent over the last year.
“We had been growing really well,” he said. “From 2007 to 2008 there was a 30 percent increase in sales. We thought, ‘We’re smoking.’”
He thinks franchises have an edge in a bad economy.
There’s the parent company’s marketing campaigns, webinars and other strategic efforts. And it doesn’t hurt to have a name that’s recognized across state boundaries, he said.
“FastSigns is better known that some smaller sign companies or independent businesses,” Niemi said.
Still, franchising and small-business interests are closely allied. Professional associations representing both have lobbied the federal government to increase support for small business though government contracts and loan support.
Data from the International Franchise Association shows that franchises in Washington state employed 203,200 people in 2005. More up-to-date data has not yet been compiled.
Some, such as Ferber with the Department of Financial Institutions, think franchises become more attractive during periods of economic instability.
The climate for business is difficult, but it’s also created a new generation of entrepreneurs. Laid-off and otherwise disenchanted workers are considering going into business for themselves — and franchises can seem like a safer route for new business owners, Ferber said.
“People might end up finding that they’re out of work and they see it as, ‘Well, I want to start my own business, but I don’t want to go it alone,’” he said. “They may be more interested in the franchising concept than the traditional day job.”
Read Amy Rolph’s small-business blog at www.heraldnet.com/TheStorefront. Contact her at 425-339-3029 or arolph@heraldnet.com.
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