As the Capital Region has grown, so has the number of franchised small businesses. Franchises are more likely to pop up on the landscape in daunting economic times because acquiring startup financing can be much easier with the proven business plan behind the company name.
Just ask Christopher Womack, the owner of two franchises of The Melting Pot, one on Corporate Boulevard and one in New Orleans. He says opening a franchised restaurant was a much smarter move than attempting to open his own restaurant.
“What it does is allow you to get capital that you wouldn’t get otherwise,” he says. “It just shows you have to have a proven business model. Whereas if I wanted to finance Chris’ Fondue Place, no one would finance me.”
According to franchising information on The Melting Pot’s Web site, financial requirements necessary for approval include an initial fee of $35,000, initial cash investment [nonfinanced] of $250,000 to $300,000 and additional financing ranging from $727,845 to $1,494,395 or more—depending on the site, market area and buildout costs. The total combined net worth minimum is $500,000.
And these days, easy access to startup capital is essential for businesses. The Missouri-based Kauffman Foundation released a study last month detailing the nation’s entrepreneurial statistics, including information regarding capital sources for small businesses.
The study, which sampled more than 4,000 small businesses, found that “roughly 80% to 90% of most firms’ startup capital is made up in equal parts of owner equity and bank debt.” The “average firm has approximately $78,000 of financial capital,” half of which is obtained from outside equity—equity that is becoming more difficult to access.
But franchisees in the Capital Region are weathering the current financial storm without seeing much of the national chaos affect their day-to-day operations. Bryan Greenwood, a professor in LSU’s E.J. Ourso College of Business, says “Baton Rouge is still lagging in the credit crisis on the national economy.” He cautions, however, that “in 12, 18 or 24 months, that might change.”
Things have already begun to change for Rick Pastorek, owner of the Bennigan’s franchise in Baton Rouge. In July, the parent company of Bennigan’s Grill & Tavern—Plano, Texas-based Metromedia Restaurant Group—abruptly closed the financially troubled chain and two sister brands.
“In our case, the fact that the parent company went bankrupt was unfortunate,” says Pastorek, whose company, BOL Inc., owns Bennigan’s in Louisiana and Tennessee that remained open when the chain filed for Chapter 7 bankruptcy. “While Baton Rouge is somewhat insulated, full-service restaurants nationwide are trading down.”
A great deal of consumer behavior can be easily attributed to the overall consumer sentiment over the past year.
According to GE Capital Solutions’ third-quarter franchise finance restaurant update, “Consumer spending, accounting for two-thirds of all U.S. economic activity, was at its weakest point in six months for the month of August, remaining unchanged, rather than increasing the expected 0.2%.”
But franchises overall have a boost to fight off the lack of consumer confidence—namely, brand recognition. While Pastorek says that was a blessing and a curse after Bennigan’s parent company went under, Womack acknowledges he has an advantage.
“Consumers gravitate to brands they know,” he says, adding they also gravitate to brands that promise to deliver a consistent experience.
The Wine Loft franchisor Jason Doyle credits his company’s success to the same concept of loyalty and familiarity. Doyle says the local franchise—with locations on Laurel Street downtown and in Perkins Rowe—as well as those that have opened across the country, benefit from brand recognition.
“We’re a lifestyle brand,” he says. “People can go to a grocery store and buy a bottle of wine that we’re selling. So when they come to us, they are buying a social experience. And that is successful no matter what the economy is like.”
But The Wine Loft franchise, which could soon open locations in places like Dubai and Switzerland, has continued to remain successful for the franchisor as well as the franchisee. They have retained some immunity to the national economic crisis as a result of what can be called a solid, profitable business plan.
Baton Rouge is listed as a Level C market for The Wine Loft, with a liquidity range of $75,000 to $120,000 and a total investment range from $200,000 to $350,000. Using Level B as an example, The Wine Loft also estimates startup costs, including $417,258 for construction, insurance, equipment and furniture, $37,000 for opening inventory and $7,500 for opening parties and payroll. The total is $461,758.
Their success, Doyle says, is a “testimony of having a good model and supporting the people that run it.” That support and a proven business model are distinct advantages that franchise models have over the typical entrepreneurial small business.
That’s what it all comes down to, Greenwood says. “You just have to subscribe to the philosophy that if you have a good idea, it will be funded.”
And the key to the franchise is that someone, somewhere has already had the good idea that gained funding, increasing the small-business owner’s chance of finding the funding and the market for their idea.
FRANCHISING 411
What to think about before you dial the 800 number.
Is it your passion?
It’s never a good idea to jump into a new business if it isn’t something you truly love. Work will always be work, but it is that much better if you like showing up to the office every day.
Do your homework.
Before you get in over your head, make sure you know the franchisor’s history. Some come with a lot of support. Some come with very little. Finding the right balance will be key to being comfortable and happy with your franchisor.
Know your market.
The concept might be great, the support stellar and the profitability high, but if there is a similar franchise in the area, you are doomed. Know what is already there and what will work first.
Test drive the concept.
Put feelers out, do research and conduct a survey to make sure you know whether or not your target audience is amenable to being reached.
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