A New Golden Age for Franchise Investment
Franchise Investment: Despite suboptimal economic conditions here in the Unites States; there will continue to be a steady stream of new businesses blooming throughout the country. As more Americans find new ways to earn a living, small business ownership will continue to rise. A relatively safe haven for first time business owners can be found in the world of franchising. The potential for growth in this area is almost limitless due to a massive shift in how people look at their careers.
Just a generation ago most young people joined the working world with hopes of finding a long-term job with a good company that could offer them a future. This is a concept that seems incredible by today’s standards. In the 21st century, young people no longer expect to have one job in their lifetime. In fact, more young people than ever are turning to business ownership as the preferred career path.
A clear indication of this trend toward entrepreneurialism can be witnessed by observing our higher education system. According to a study by the Ewing Marion Kaufman Foundation, in 1980, there were fewer than 300 Universities in the United States that offered course work in entrepreneurship. By 2007 nationwide, there were more than 2400 Universities teaching entrepreneurship and even offering full degree programs. This explosive growth was clearly due to the demand in the marketplace and has helped fuel the self-employment surge.
Currently there is an enthusiasm for self-employment never before seen in the postindustrial age. Many factors are driving this trend, but chief among them is globalization. In the scope of about a generation, we have entered into a truly global economy. The interdependence between nations is now so great that one major player’s recession can trigger economic turmoil across the globe.
The globalization of the economy has created an intensely competitive business environment. As companies strive to reduce costs and become more efficient, farming out certain components of their business makes sense. Companies used to produce most of the components that went into their finished product in house, now suppliers typically make these parts. In many cases, final assembly is outsourced as well. Additionally, companies used to perform all of the functional roles necessary to run their operations in house. This is no longer the case either.
The outsourcing of production and business processes has resulted in the demise of the traditional corporate structure. This has created a pyramid of interdependent relationships. At the top of the pyramid is a client company that is integrating services from vendors who provide outsourced solutions for a multitude of business functions. In turn, each of the vendors is also a client company with various other vendor companies supporting their efforts. This change has caused a shrinking number of jobs in major corporations, but it has created immense opportunities for entrepreneurs to provide the services that were once generated in house. The demand for these supplier companies is one of the key drivers of the new age of entrepreneurialism.
Another key driver, specifically in the United States, has been the deterioration of the business friendly environment for major corporations. The U.S was once the most desirable place in the world to headquarter a major corporation. The rule of law, respect for property rights and reasonable taxation were bedrock principles in post World War II America. Right or wrong, the level of corporate taxation has risen to the highest in the world among major countries. Additionally, government interpretation of eminent domain laws has grown increasingly liberal and the concept of blind justice is threatened by a trend toward delivering specific outcomes for favored parties. Regulatory burdens and the cost of labor add to the mix making the U.S. much less desirable for big companies. In a global economy, capital is highly mobile and clearly large corporations are taking advantage of the opportunity to set up shop elsewhere. What this means is that the abundance of six figure jobs has been restricted and this trend shows no signs of being reversed. So the path to prosperity for a growing number of ambitious people will be through small business ownership.
Investing in a franchised business model is about the safest bet for most new business owners. Far too many people underestimate the value of a proven business model. In essence, a business model is simply a system for making money. This system is far more important than one’s overall business experience. Having previously worked from entry to executive level in corporate America, I thought I knew plenty about running a business. Boy was I wrong. When I started my first business, I learned how much I really didn’t know. Large corporations have legions of departmental staff who address all of the issues that land squarely on the plate of the small business owner.
Executive experience provides many valuable skills, but those do not guarantee success in a small business. A successful business model can only be created through a process of trial and error. This process can be very expensive, far more expensive than the average franchise fee. The inevitable trial and error costs have already been paid for by the franchisor, so a new franchisee can focus on growing the business, instead of on how to create a functioning model. This is often the difference between success and failure in a new company.
Some people think that the highly structured environment of a franchise may not be suitable for them, and some people are right, it isn’t. However, the majority of people are very accustomed to working in a highly structured environment. Let’s face it, we are programmed to live in that environment our whole lives. From K through 12 education, to military service, college and corporate life, we are always following very specific rules and guidelines. In fact, most people will not thrive without structure. So a franchise system is typically not an onerous environment, it is a huge asset. A key element of course is choosing a franchise that not only reflects your values, but is conducive to your talents, financial capabilities and lifestyle preferences.
Another important consideration when choosing a franchise is that it is an investment, and a long term one at that. There can be rich rewards for making wise investments, but prudence and patience are part of making it work. Just like investing in stock, your objective is to find a good company with a solid plan and a great management team. Ideally this company should be on its ascendency, not already at or near its peak. Buying the most expensive stock you can find is not always a great strategy; the same is true in franchising. If you want the best ROI, you need to consider up and coming franchise systems, not just household brand names. Knowing how to find them and which ones hold the most promise is far more complex than doing a Google search, but I’ll address that in a future column.
The way forward for a new generation of Americans is likely to include business ownership at some point in their careers and franchise ownership will be a great vehicle for most of them. The value of self-determination has long been core to the American spirit and once again it is driving people to seek out new frontiers of opportunity. This time the frontiers are in the business world instead of the prairies and plains of a sparsely populated continent, but they hold just as much promise.