Performance Matters

I attended an IFA Franchise Business Network meeting this morning, attended by various franchise professionals, franchisees, franchisors and regulators. We heard from franchise consulting companies, including brokers and matching companies, brand developers and new and established franchisors. The topic was the business forecast for 2010 and the primary speaker was Edith Wiseman of FRANdata.
The consensus presented is that the economy is in a technical recovery that is much slower to reveal itself in real terms. What that means is that the stock market and technical data such as corporate profits and GDP numbers are showing improvement, but those improvements are not being felt at the consumer/employment level. The employment numbers, which we have seen in a number of places, are sobering: when the unemployed are added to the “underemployed” (people who have taken lesser jobs just to work) and people who have stopped looking, the actual figure is 17% of Americans are affected. A recent Wall Street Journal article recently counted in the millions the number of “long term unemployed,” people who have been out of work for over a year. The unemployment numbers are a huge drag on any calculation of consumer spending and consumer sentiment.
Lending has also suffered a negative effect whose roots are now deep and will take some time to recover from. Franchisors in attendance who once had “preferred lender” programs now say those relationships have disappeared. Franchisors are trying to create new relationships from scratch with local and regional banks. The SBA lending limit is being reduced from 90% to 75% and some banks are responding by saying they will not participate in SBA transactions any longer. All of these developments make it more difficult for potential franchisees to finance new businesses.
Ms. Wiseman’s prognostications included a 2 to 4 year window of choppy economic developments, such that even if the overall trend may be positive, considerable setbacks will be felt along the way. She indicated that recent numbers show that franchising as a business model continues to show resilience in this economy, with a net increase in total units within 2009.
When those in attendance were asked how this recession is affecting their approach to business development, the mantra of “performance matters” was repeated. Transactions will not be entered into unless potential financial performance can be measured in real terms. In the development context, this means carefully scrutinizing potential franchisees and their financial capability if you are a franchisor, with a preference for multi-unit development deals. If you are a franchisee or someone consulting them, there is a higher demand for financial performance figures (it was reported that FDD’s containing Item 19 financial performance representations increased from 18% to 35% in the last year). Potential franchisees are also looking for incentives and discounts, which some franchisors are now willing to consider.
All told, the mood in the room was sober, but not somber. People were optimistically looking for the light at the end of the tunnel and planning accordingly.