With financing, franchisees create jobs

In real estate, the key factors are “location, location, location.” In discussions about the national, state and local economy, the focus now is “jobs, jobs, jobs.”

As we look for ways to shift the recovery into higher gear, lawmakers, regulators and business leaders could take a closer look at an American business model that shows job-creation promise: franchising.

Franchising, including the indirect jobs it creates in its suppliers, accounts for roughly one in eight jobs in America. But this unique business model, as American as baseball and Baskin-Robbins, could lead to the creation of millions of new U.S. jobs in the next years — if we take steps to make sure it happens.

From 2001 to 2005, franchised small businesses created jobs at a rate far outpacing the national average. Franchise employment now exceeds the total employment of such major industries as durables manufacturing, finance and insurance, and real estate.

The structured, scalable franchise model allows small-business entrepreneurs — the key to job creation in this country — to grow jobs at an accelerated rate. For example, Decatur-based franchisee Aziz Hashim started with 15 employees in 1996. This year, he will employ nearly 1,500 people across several franchise brands. Hashim creates more than 30 jobs every time he opens a Popeyes restaurant. His employees include accounting, real estate and IT professionals in addition to restaurant floor staff.

“I could never have had this success in life without franchising,” says Hashim, who got his start mopping floors at Burger King while studying electrical engineering at the University of California, Irvine.

Atlanta is a hub for franchising: Brands such as Coca-Cola, InterContinental Hotels, UPS (which owns the UPS Store), Church’s, Chick-fil-A, Wendy’s, Aaron’s, Primrose Schools, Moe’s Southwest Grill and Carvel all have headquarters here.

But franchising, by definition, depends on the ability of individual entrepreneurs to access credit. Recently, 55 percent of members of the International Franchise Association stated that they were “moderately” or “significantly” impacted by the lack of credit access, putting a choke hold on their ability to grow their businesses.

The UPS Store, with about 4,300 units in the U.S., added more than 500 units in 2004. Last year, that number had dropped to 83.

While franchisors and franchisees are encouraged by a stronger overall economic outlook for 2011, lack of credit flow is holding back a broader recovery.

While the UPS Store, for example, wants to increase growth by 50 percent over last year, “Several of the larger SBA [Small Business Administration] lenders are no longer offering financing to our network because of the hoops they have to jump through to offer the smaller loans that our franchisees require,” says Canton native Stuart Mathis, now president of UPS’ Mail Boxes Etc.

Meanwhile, many lenders are faced with sharp declines in the value of borrowers’ collateral, new regulations and high unemployment rates in addition to a battered public image that increases aversion to risk.

What can be done? The UPS Store has taken matters into its own hands by offering an innovative loan program developed by Franchise America Finance and the Bancorp Bank. The company is working to help underwrite $22.5 million in loans to small-business franchisees at preferred rates.

Roark Capital Group, an Atlanta private equity firm, has created similar lending programs to assist entrepreneurs with Wingstop, FastSigns and its full range of Focus Brands such as Cinnabon.

For its part, the U.S. Small Business Administration, working with the International Franchise Association and others, has raised loan guarantee limits from $2 million to $5 million. Some leading banks have announced they are stepping up small-business lending efforts.

But more is needed. That’s why the IFA is hosting a Small Business Lending Summit this week in Washington in cooperation with the National Association of Government Guaranteed Lenders, the Consumer Bankers Association, the National Restaurant Association and others to identify opportunities to improve credit access and job creation through franchising.

SBA Administrator Karen Mills; Sen. Mary Landrieu, D-La., chairwoman of the Senate Committee on Small Business; House Small Business Committee Chairman Sam Graves, R-Mo.; Don Graves, the Treasury official working with “jobs czar” and GE CEO Jeffrey Immelt to accelerate the recovery; and Federal Deposit Insurance Corp. Vice Chairman Martin Gruenberg will speak at the summit.

At this unprecedented conference, I will present estimates that if credit conditions are favorable, the franchise model, based on its previous accelerated rates of job creation, could potentially create millions of new jobs by 2017.

“Franchising, if properly financed, can be a catalyst to turn the U.S. economic recovery into a jobs recovery,” says IFA President and CEO Steve Caldeira. With the summit as a high-profile launch, Caldeira has strategically and correctly made expanding credit flow the organization’s chief priority.

No single business model is the answer to our long-term economic challenges. But all of us — including taxpayers and business, financial and policy leaders — have a stake in giving entrepreneurs the tools they need to grow and create jobs.

“If people understood the true power of franchising,” says Popeyes franchisee Hashim, “we as a country would rely on it to spread the American dream.”

Jeff Rosensweig is an associate professor of international business and finance at Emory University.