At least two firms, Franchise Research Institute and Franchise Business Review, query existing franchisees in dozens of systems on their satisfaction levels and publish the results of those polls on their Web sites. Such research – typically funded by the franchise itself – may be a telling indication of how well a franchise system is working, or whether it should be avoided. The reports can be purchased for $24.95 on Franchise Research Institute’s site but are available for free on Franchise Business Review’s if franchisors agree to post them.

Both firms survey franchisees on a confidential basis, to assure them they won’t be identified and possibly punished for expressing their true feelings. Both also seek to survey most of a system’s franchisees to verify that the opinions are representative rather than those of a few grouches.

Although the questions they ask are similar – including the crucial “would you recommend this franchise to others?” — the firms’ approaches differ. Franchise Research Institute charges the franchiser involved before undertaking the survey; Franchise Business Review collects a fee after doing the research, if the franchiser wants to see what it found.

Both firms affix stamps of approval on franchisers whose franchisees generally endorse their systems. The Franchise Research Institute awards a “world-class franchisee” seal whereas the Franchise Business Review hands out “Best of the Best” citations.

Franchise companies fund the surveys partly to use the results – if positive – to recruit new franchisees. But often, the surveys can reveals cracks in the system that’s useful information to proactive franchise managers and potential investors alike.

“Some surveys will give extremely bad news to a CEO and a company’s owners,” says Jeff Johnson, president of Franchise Research Institute in Lincoln, Neb. One common issue is a franchise system that’s rapidly growing. “That causes all kinds of concerns among franchisees,” including haphazard support from field personnel, he says. If a franchise isn’t listed on the Institute’s site, a potential franchisee should ask the franchiser whether it has been graded, and what the results were, Mr. Johnson adds.

Eric Stites, who founded Franchise Business Review and runs it out of an office in Kittery, Maine, says that occasionally a franchiser he approaches with a survey pitch will turn him down. “If they have an issue they will try to squash a survey,” he says.

While he gave out 115 awards to franchises last year, and posts some of them on his site, Mr. Stites says that 80% of the franchises operating today “are simply average or below-average business opportunities.” Fast-food restaurant and automotive-related franchises often score near the bottom in his franchise-satisfaction surveys, he adds. Even so, his site recently posted a list of 11 “top food franchises.”

“A lot of dissatisfaction in franchising comes from [franchisers] not meeting initial expectations, which are typically set during the sales process…by overly-aggressive salespeople, unfortunately,” Mr. Stites says. On the other hand, companies with the highest franchisee satisfaction scores typically “don’t oversell their systems – in many cases they undersell it — and are very selective in their recruitment process,” he says.

For their part, franchisers who get disappointing approval ratings say the surveys often guide their decision-making and can lead to better operations.

For example, when Great Harvest Bread Co. , a Dillon, Mont., bakery chain, got a significantly lower score in its Franchise Research Institute survey several years ago than it had previously, the company’s executives realized they had responded too slowly to the low-carb craze.

“We had taken the position that we sell carbohydrates for a living,” recalls company president and chief executive Mike Ferretti. “But our customers were saying, ‘We’ll go someplace else. Many of us are no longer eating what you sell.’ ” As a consequence, the chain introduced a low-carb bread that remains a popular item. “Franchisees were right about our head-in-the-sand attitude,” Mr. Ferretti says. That experience “taught us a very valuable lesson.”

It is true that there are fees associated with the initial startup of a franchise, but that fact by itself shouldn’t dissuade you from deciding to venture this direction. After all, there are expenses related to the startup of any type of business. You need to ask yourself what you are getting in terms of business support and marketing advantages when you choose to buy in to a franchise.

Three ‘Pros’ for Franchising

1. You Gain a Healthy Head Start with Brand Name Recognition
If you choose to start your business from the bare ground, you’re at a disadvantage in terms of name recognition from the beginning because no one will ever have heard of your brand before. While you can surely raise awareness for your company’s namesake, it takes time, energy, and money. When you open a new locale of a known franchise, you’re already ahead in the race when it comes to name recognition. A major bonus associated with franchise ownership is the simple fact that prospective and existing customers are already likely to know about your brand names and company before you even open up for business.

2. Solid Support Channels from Corporate
Being an entrepreneur can turn out rather lonely. When you’re launching a small business by yourself– or even with a few partners – you end up on your own when it comes to deciding what to do first, next, and so on. In franchising however, although you’re an independent small business owner, you have teams of people in place at the corporate offices with a duty to assist you, as well as other franchise owners in other markets. They have experience with the same issues you’re facing and can offer ideas, help, and advice. So, even though you have the autonomy of entrepreneurship, when you own a franchise you aren’t really all by yourself.

3. Smart Preparations Can Lead to Quick Success
There are a handful of ways through which opening a franchise can build a platform for success in your favor. First, the business has already experienced success elsewhere, or it wouldn’t be a franchise at this point. You already know that the concept is viable when you choose to open a franchise, because it’s already operating in another locale. The system works; it’ll be your choice whether or not it’s a workable business for your market and to make it succeed. Further, overall, franchise start-ups have a much higher success rate than other small businesses. Trust what works, what has always worked and those whose success depends on yours.

In franchising, a company lends its trademark and business system to an owner-operator who pays royalties for the right to use them. Starbucks (SBUX), Quiznos, Jenny Craig, Ace Hardware, Maaco, Pakmail – all are franchise businesses. In the U.S. there are more than 900,000, directly employing more than 11 million people.

From 2001 to 2005, the collective payrolls at franchise operations grew by 22%, to $279 billion. But that growth rate, with its healthy spin-off of jobs, has since ground to a halt, yet another byproduct of the credit crisis that produced the recession some experts tell us is nearly over.

“The flow of credit to franchisees has essentially ceased,” said Matthew Shay, chief executive officer of the International Franchising Association. “A number of banks have either left the market completely or stopped lending to small business. Without credit for people to get started in business and then to operate a business in the short term before it becomes profitable, that makes things very difficult.”

In January, the IFA predicted a loss of 10,000 franchise businesses this year, jettisoning more than 200,000 jobs. That dire forecast was predicated on the estimate that access to credit would be down by 25%, which now may seem like wishful thinking.

“We recently updated that assessment,” Shay said last week. “We now think access to credit is down closer to 40% this year. It’s become worse. We are leaving tens of thousands of jobs on the table.”

Franchise consultant and blogger Joel Libava, aka “The Franchise King,” is in the business of “strategic matchmaking,” lining up potential franchisees with the many thousands of companies that dole them out.

“I was talking with a major Cleveland-area lender recently,” Libava said. “I asked him ‘If I sent you someone with a million dollars who was looking for a $250,000 loan for a franchise - putting up $100,000 of his own - what would you tell him?’

“He told me he’d pass,” Libava said. “He said ‘We have no interest in looking at any start-ups now. There’s too much risk.’”

Libava said he’d been hearing similar things from bankers for more than a year now, “but I’d never heard it said as strongly. It’s definitely a new trend going on this year. Banks just aren’t very interested in loaning to startups.”

Businesses with fewer than 20 employees account for 25% of all jobs, but in the 2003-2007 economic expansion, they generated 40% of the job growth, according to Mark Zandi, senior economist for Moody’s Economy.com.

“In their recent efforts to recharge the economy, policy makers have all but forgotten small business, finding it both easier and more visible to help large multinational firms,” Zandi told the New York Times this week. “Unfortunately, though, big business can’t provide the jobs needed to power the economy forward.”

PricewaterhouseCoopers prepared a study for the IFA in 2006 that concluded new franchise growth over the previous five years had generated 140,000 new businesses and 1.2 million jobs.

“Franchising now provides more jobs than many other sectors of the economy, including the durable goods manufacturing and financial activities sectors,” Shay said. “It is clear that franchising is a critical engine of economic growth in the United States powering local communities across the country.”

Many people think only of fast-food when they think of franchises. But the Franchise Association now lists more than 75 different categories to describe its members. Franchises range from advertising/direct mail to construction to dating services to home inspection to security systems to video rentals. Printing and copying centers, maid services, computer repair, lawn-care services, real estate, lodging and travel agencies. More than 400 U.S. franchise systems operate internationally. Subway alone has more than 26,000 franchises in 84 countries.

Franchising is attractive to many entrepreneurs because it offers many of the advantages of a partnership. According to an IFA brochure: “Franchising means being in business for yourself but not by yourself. Whether it’s accounting and financing, advertising and public relations, personnel management, purchasing, or inventory control, franchisors are there to provide ‘hands on,’ one-to-one assistance.”

For a potential franchisee, the start-up costs can range from $20,000 or less, to more than $1 million. Seventy percent of franchisors charge an initial fee of $40,000 or less, and the average investment, excluding real estate costs, is between $350,000 -$500,000.

But in the current environment, lining up the money is not for the faint of heart. Consider the travails of Tom Drennen as he struggled to open a Beef O’Brady neighborhood pub in Newport, Ky., last year. The franchise operator advised him to apply for a $500,000 loan with New York-based CIT (CITGQ), then the nation’s largest National Business Association lender.

“They were very strict,” he recalled this week. “I had to put 15% down, I had to get an architect signed up, I got general contractor bids and acquired a lease that I had to personally guarantee.”

By October 2008, Drennen said all of CIT’s loan requirements had been met, and the loan was set to close in two weeks.

“Then CIT called me and said ‘We’re freezing all our loans, we can’t lend you the money,’” he said. “I asked about all the commitments I had lined up, and they said there was nothing they could do.”

Because he already had signed the lease to get the CIT loan, Drennen began paying $5,000 monthly rent on an empty building.

“I hit the streets,” he recalled. “I hit up every single bank in northern Kentucky and southern Ohio, from nationally known to community banks. They were all so scared. They didn’t want to do any startups, and told me restaurants were especially risky. At least 30 banks turned us down. I tried to find creative ways to get out there, finally reaching real deep into my pockets.”

After reading about the federal stimulus money being funneled to banks, Drennen made a second round of all the lenders, this time putting up 60% of the money himself.

“They still kicked me out” he said. “They wanted nothing to do with a startup. It was really confusing, I felt like I was misled. I thought the stimulus money was put there to get back out to the public.”

Finally, Huntington Bancshares (HBAN), a regional lender out of Columbus, Ohio, agreed to lend him $100,000. Through his research, Drennen found out about an economic development district that had been formed in Newport in the 1970s after a flood.

“It was a revolving fund that was still operating” Drennen said. “They got with the bank and both went in for 20%.”

After paying nine months’ lease on the vacant property, Drennen opened July 27.

“We’re doing excellent - me and the 40 employees I hired,” he said.

Tom Drennen at his storeHis advice: “Be resilient. If you are someone who gives up, this isn’t for you. You’re gonna be turned down many times, but realize they are giving you constructive criticism all the time that you can use with the next bank. Each turndown made me that much more determined to prove them wrong.”

Most sectors of the Russian economy has seen a significant business slowdown caused by an abrupt drop in demand for almost all kinds of goods and services, by a reduced scope of financing opportunities and available loans and, as a result, by numerous payment failures. All spheres of business, including franchising businesses, have to react to it in different ways.

The first and most wide-spread reaction to economic difficulties is to cut down on expenses and to start to economize on everything. At present it is vividly illustrated by mass lay-offs and payroll reductions. In the retail industry it can also be seen in the reducing number (or complete abolition) of free services, e.g. free plastic bags in supermarkets. The ultimate stage of this kind of measures is a partially or completely frozen business. It happens either in the form of shorter working hours or of an indefinite period of total inactivity. From the buyers’ point of view, to cut down on expenses and to save on everything one can save on means fewer purchases and less expensive counterparts of usual goods. At the same time certain companies – with a few franchising concepts among them – have managed to take advantage of the economic crunch. For instance, many QSR’s have increased their sales volume due to the fact that new clients have turned to fast food restaurants from higher priced cafes.     

The second type of reaction reflects changes in corporate policies that aim at stimulating the demand. This kind of measures includes various discounts and promotion activities. Franchising stores are lavishly decorated with bright posters announcing unbelievable discounts – sometimes 50% or even 70%. It is mostly seen in the garment and footwear retail chains. The second type of reaction to the economic hardships also covers certain attempts to help buyers with financing a purchase. For example, one of the largest Russian car factories – Gaz – offers its buyers to pay a portion of the interest rate in case a bank loan is involved in the purchase of a car. The regional government of Nizhniy Novgorod (where the factory is situated) also tries to incite people to buy Gaz cars. The official offer is 50,000 rubles (about 1,640 USD) to everyone who decides to exchange their old car to a new one from the Gaz plant.

Most far-sighted entrepreneurs and top managers choose the third type of reaction – to critically study the range of their goods and/or services in order to change it in accordance with the current situation. The same car factory – Gaz, for instance, has announced a soon to appear new variation of their popular model with a much cheaper engine. Retailers and wholesale companies have also started to offer “anticrisis” versions of their goods and services.

The forth way to react to the difficulties of the world economy is less widely spread and includes attempts to improve and optimize marketing and sales techniques. However, more and more entrepreneurs turn to analyzing the efficiency of advertizing and opt for cost-effective partisan marketing instead of more conventional means of advertizing. 

Franchising concepts in Russia start to change as well against the background of the above mentioned changes in different spheres of business. The general drop in demand for all kinds of goods and services has affected the potential buyers of franchises, i.e. the investors. Some time ago buying a franchise was considered as one of the safest ways of capital investment but now the situation has changed. The profitability of many franchising concepts reduces. Potential investors understand it and show less interest in buying franchises. The number of investors in the retail sector has significantly decreased. Unfortunately, some Russian franchising concepts have already faced forced closings of their franchisees. Although none of the Russian franchisors have shut down so far, there are already a couple of cases of totally frozen businesses.    

Speaking about the garment and footwear retail chains it is worth mentioning that the worst situation is seen in the mid-priced segment. Clients can be now divided in two basic groups: those who don’t feel any difference because of the world economic crunch and are used to buying whatever they like constitute the first group and tend to buy expensive goods; and the rest of us who have to be more careful with their spendings fall into the second group and buy predominantly cheap goods. There is less and less demand for mid-priced goods. Thus retail stores of this price segment are forced to shut down. It can easily be seen by a growing number of free spaces in shopping centers. Therefore, the drop in demand also affected the development and introduction to the market of new franchising concepts in Russia, especially in the retail sector.    

Nevertheless, potential investors who are willing to invest their money in a new business with the help of a franchising model can still be found in Russia. First of all, they are the people who try to secure their capital against inflation and vague economic perspectives.

The economic crunch revealed the most stable businesses. These are the companies that increased their sales volume instead of reducing all activity. And sometimes it happens not “instead of” the crisis but “thanks to” it! The majority of these businesses fall into the production and service spheres which can be regarded as a positive trend (taking into consideration the fact that there are not so many production franchises either in Russia or in Western countries). Investors are more willing to start a new business in the sphere of production or services than in the retail sector as in the longer term this type of investment is considered more secure. The investors’ interest to the above mentioned spheres is also influenced by the following factors:  

1. Many qualified specialists have been laid off in these spheres and are now eager to work, even for a lesser salary.  
2. A growing amount of unoccupied commercial real estate gives a chance to find an appropriate property with a lesser rent.  
3. Buying a franchise helps to start a new business in a short period of time and thus to diversify the existing business assets reducing commercial risks.
4. And the most important factor – any franchising concept must have reliable proof of its success. If the business overcomes the economic hardships and moreover introduces a new franchising concept to the market, it is worth studying this business offer. “Crisisproof business” may become a new quality mark for a franchise.   

One of largest footwear discounters promises to open 150 stores in Russia.

An American footwear company Collective Brands Inc. (footwear stores Payless and The Stride Rite) has announced the oncoming opening of Payless stores in Russia. The chain of inexpensive designer footwear stores Payless was established in 1956 in Kansas, the USA. According to Hoover’s, last financial year Collective Brands’ sales amounted to $3.442 billion (with 4.5 thousand outlets in more than 10 countries of the world).

A co-owner of Alba footwear stores Alexander Bayer says that Payless is a classic example of a footwear discounter. “They are our direct competitors”, - admits Sergey Lomakin, a co-owner of another footwear chain in Russia - CentrObuv. The main part of Payless assortment is footwear, but the stores also sell clothes and accessories. An average price for a pair of shoes is $30-40. The most expensive ones are sold for $49.99, as Payless official web site has it. Taking into ac count the customs expenditures the same footwear in Russian stores can turn out to be 25-30% more expensive, believes Alexander Bayer. This price range is comparable to that of CentrObuv stores where a pair of shoes costs $30-70, according to the company’s on-line catalogue. 

A holding from Kuwait - The Alshaya Group - now possesses the exclusive rights to franchise the Payless brand in the Russian market. The first stores are expected to open their doors at the beginning of 2010. According to Collective Brands’ CEO Matthew Rubel, by 2015 the company plans to increase the number of stores up to 150 outlets. The Russian stores will be managed and operated by The Alshaya Group, while Collective Brands Inc. will have an option to purchase the whole chain in future.

The Alshaya Group runs business in Kuwait, Saudi Arabia, Turkey, Cyprus, Egypt, Poland, the Czech Republic, Slovakia and Russia. In Russia it already develops a number of Western franchise concepts such as The Body Shop, Mothercare, Next, Claire’s and others. According to the company’s web site, it has more than 80 stores in different Russian cities. Furthermore, the holding develops the Starbucks chain in Russia. The first Starbucks coffee shop opened in Moscow in September, 2007. The second one followed in December, 2007. Now there are already 19 locations in the Russian capital where one can chat over a mug of coffee in a globally known atmosphere of a Starbucks café. And obviously the chain will grow further beyond the borders of the capital city.

Although the Moscow office of The Alshaya Group doesn’t comment on their new franchise and the details of the agreement with Collective Brands Inc., it’s evident that foreign franchisors from quite different spheres trust the Kuwaiti holding, and not without reasonable ground.

Colombiano Coffee House’s rich history & concept is inspired by a mythical love story taking place as far as 1923, with the opening of “Coco’s Coffee shop” in Costa Rica. Colombiano Coffee House is not your conventional corner Bistro/Café. With its terrific food and drink menu, it is the spice of Latin Taste, combined with the excitement of Latin Life, for a completely enjoyable and satisfying experience in a chic, comfortable environment. Colombiano Coffee House is thrilled to have IFG representing them in Russia and other parts of the world. “We personally believe that IFG is extremely well-experienced in Russia,” says Colombiano Coffee House’s Director of Development, “and the probability of obtaining serious contacts which will lead to signed Franchises is much higher with IFG than with others.”

Currently operating in Lebanon, Qatar and Abu Dhabi, Colombiano Coffee House understands that, when it comes to Food & Beverages, including Coffee, people all over the world want quality.  O. Victor Lattanzi, CEO of International Franchising Group, LLC notes, “The Colombiano Coffee House concept is terrific, not just for the customers, but for the owner-operators as well. They are going to love the concept, the coffee, the smoothies, the food and the culture.”

Brinker International, Inc. has entered into a development agreement to bring their popular Chili’s Grill & Bar concept to Russia. The first Chili’s will open in November 2010 in Moscow, with 25 total restaurants planned for expansion in the Russian Federation per the terms of the agreement.

John Reale, president of global business development for Brinker International said, “Russia offers vast potential for the Chili’s brand, and we look forward to sharing our unique bold flavors and dining experience with guests throughout the country.”

Brinker International currently owns, operates or franchises 203 international locations in 29 countries and two territories outside the United States. As part of the company’s goal to become the globally dominant casual dining portfolio company, Brinker International plans to have 500 restaurants open outside the United States by 2014.

Learn More About Franchising Internationally >>>