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How to Start a Business Using the Franchise Model

It’s one way for entrepreneurs to get going

By Jose Melendrez

STORY TOOLS

Successfully starting a business during the current economic crisis has become increasingly difficult. Owners must develop the appropriate legal structure, as well as effective marketing and merchandising techniques. Most new businesses fail during in the development stage and collapse less than six months following inception. 

Faced with such headwinds, many burgeoning entrepreneurs have turned to opening franchises of established businesses as an entry to business ownership. By using preexisting brand recognition, loyal customers, and strong business models, owners have fewer decisions to make and can focus on productivity and profitability.

Ira Davidson, director of Pace University’s Small Business Development Center, explains that while any start-up carries with it a high risk of failure, opening a branch of an existing franchise has proven predictably successful.

Indeed, the International Franchise Association projects that by the end of 2012, the number of U.S. franchises will increase by 1.7 percent, equalling 12,454 stores and 177,000 new jobs. Similarly, the gross domestic product of the franchise sector is expected to increase to $461 billion, or 3.4 percent of U.S. GDP.

“We see inherent value in franchises that have proven business models. The strongest franchises came through the economic downturn, made adjustments to improve their businesses, and now are poised to grow in the year ahead,” says Chris Ledesma, vice president of marketing and strategy of Wells Fargo SBA Lending.

A Case in Point
Following the successful addition of more than 4,600 stores in 605 locations worldwide in 2011, 7-Eleven, Inc. intends to continue expansion. “We expect to franchise 750 stores in 2012 [in the U.S.] and another 850 locations in 2013,” says company spokeswoman Margaret Chabris.

In the U.S., more than 300 stores are franchised through 7-Eleven’s business conversion program, whereby independent operators convert branches, enabling store owners to become franchisees.

The company credits strong management and experience for such success. Timothy Lankford, manager of franchise recruiting and marketing, explains that each franchise has a business consultant who routinely meets with franchisees to assure profitability. “Our system allows us to track every product in the store and identify what products are in more demand. We focus on helping [franchisees] connect with their local community,” he says.

Leadership
Then there is CKE Restaurants, Inc., a conglomerate of chains such as Carl Jr.’s and Hardee’s, that reported opening more than 40 U.S. and 70 international franchises in 2012. CKE is adamant about devoting resources to assure that franchisees build in new and existing markets and “encourage their participation in the decision-making process through their respective franchise association,” says Andy Puzder, CEO of CKE.

Providing premium products at bargain prices also sets CKE apart from its competitors, Puzder says. “We charge a reasonable price for our products and maintain a reasonable margin” which, he says, gives it an advantage over competitors.

CKE sells about 840,000 hamburgers each day in the U.S. and more than 140,000 internationally. Carl’s Jr. has 1,322 franchises; Hardee’s has 1,932. Puzder says that CKE provides significant employment opportunities for minorities and women and is proud of its diverse workforce.

Still, some franchises provide direct incentives to minorities.  RadioShack Corp., offers minority franchisees (and U.S. veterans) up to a 15 percent discount on the initial franchise fee. Marty Amschler, a RadioShack vice president, sees a niche and an untapped market in Hispanic neighborhoods and says the company has “unparalleled training and marketing support” and focuses on individual franchisees and how they can succeed in their locations. By the end of 2012 the retailer plans to open 10 new U.S. branches and by 2013, expects to extend more than 100 franchise agreements. •

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