If you’re wondering who’s going to do well in this economy, look no further than companies that sell franchises. In a very insightful article on MSNBC.com, Mark Siebert notes that the increase in the unemployment rate of 1.4 percentage points over last year adds 2.2 million people to the jobless pool. And “every 0.1 percent increase in the unemployment rate adds another 150,000 prospective franchise buyers to the marketplace.” Add to those who are being pushed overboard the folks who are going to jump before they are pushed–Siebert calls them the “near layoffs”–and the pool grows larger still.
So lots of workless people are sloshing around. Franchisors are salivating, and that’s true whether you’re in the retail market, the fast food industry or even the managed services market.
Lots of folks have already sold out of the market and are sitting on cash earning no return. These people are looking for ways to put their money to work. While there may be fewer people willing to plunk down a million bucks for a Dunkin‘ franchise, those same people may fork over $500,000 for something else, and there are plenty of franchises available for that amount or less.
Mr. Siebert has a consulting firm that helps companies franchise their businesses, so he has a particular point of view supporting franchising. I come from the opposite angle. I don’t support franchising. I am neutral. As a franchisee and business coach, I know the pluses and minuses of owning a franchised business and the dangers faced by someone who’s going into a franchise for the wrong reason.
Still, I think Siebert’s article is incredibly valuable for people who want to understand the economics at work that favor franchise sales in the coming year. There was never a time for buyers to beware more than now. If you want to find out more about the risks of franchising and how to cope with them, drop me a line.
MSPmentor contributing blogger Mitch York coaches executives who are evolving into entrepreneurs. He is a veteran of high-tech media and an entrepreneur himself. Find York — and his personal blog — at www.e2ecoaching.com. MSPmentor is updated multiple times daily. Don’t miss a single post. Subscribe to our Enewsletter, RSS and Twitter feeds.
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Tags: | IT Consulting Franchise | Managed Services Franchises | MSP Franchises
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Personally I do not think that a poor economy will help franchise sales in the IT arena.
We should not forget that this is a credit crisis as well; markets for cash are hard as a rock already. IT related franchises are very difficult to collateralize because it is a service based business with very little hard assets and as a start up no bankable contracts either.
Furthermore I think that the people that are going to get the layoffs are not going to be the folks who might be a candidate for a computer repair type franchise. Are there even MSP franchises?
Technology and Franchises in the IT related areas are a bad investment in any economy. You can bootstrap an IT business for the same cash investment and when you are out of your diapers you will be free of your “franchise tax”
I looked into this and had many discussions with many people. It was a bad Idea then and I think it still is.
Brad
Personally I do not think that a poor economy will help franchise sales in the IT arena.
We should not forget that this is a credit crisis as well; markets for cash are hard as a rock already. IT related franchises are very difficult to collateralize because it is a service based business with very little hard assets and as a start up no bankable contracts either.
Furthermore I think that the people that are going to get the layoffs are going to be the folks who might be a candidate for a computer repair type franchise. Are there even MSP franchises?
Technology and Franchises in the IT related areas are a bad investment in any economy. You can bootstrap an IT business for the same cash investment and when you are out of your diapers you will be free of your “franchise tax”
I looked into this and had many discussions with many people. It was a bad Idea then and I think it still is.
Brad
Although I agree with Brad, I do think that a blend of boot-strapping and franchising may occur. I know many who have leveraged the infrastructure of stable MSP companies to supplement their “start up” size.
I know of one 2-member firm that uses the help desk of another MSP (out of state) to field all calls, provide remote support, and managed services tasks. They have been able to grow at an incredible rate this past year because they have time to focus on sales.
I really don’t see any value in IT franchises. To me there are three main reasons to buy into a franchise;
1. Infrastructure,
2. Process and
3. Brand recognition (marketing power).
Unless there is an IT franchise as recognizable as say “The Geek Squad” I don’t see that any of them meet this last requirement.
For the 1st two items, infrastructure and process reseller’s can leverage Master MSPs such as Do IT Smarter, MSPSN or The Utility Company (remember they started as a franchise and switched to the Master MSP model). Ingram Seismic, Synnex, Zenith Info Tech all offer the infrastructure side of things and MSP University can help with process.
All of these companies have a much much lower entry point than any franchise that I have seen on the market.
Lane, i think it’s valuable to mention:
4. Leveraging Economy of Scale
Having a large organzation backing you with already selected vendors and stellar negotiated contracts could save a bundle. I’m not sure if Do IT Smarter, MSPSN or the Utlility Company has done this, but just my thoughts as I read this.
Hi folks,
As the largest IT franchise, let me say – we’re already seeing it. Franchise sales are way up in Q4 this year, and the pipeline indicates next year will be great for us too. Not just franchisee recruiting, but our franchisees are busy too which is the more important part.
This recession is interesting – unlike the last downturn, which was after the so-called “dot-com bubble” burst, there haven’t been a lot of IT layoffs yet. But even folks with jobs are finding that the uncertainty of not knowing how strong their employer might really be is unsettling to them, and they look towards the self-control of self-employment.
And while you could start a business on your own, using many of the tools Lane mentions, in most cases you’ll save a lot of money by working through a franchise. Besides negotiated group discounts with most of your major vendors (including several that Lane mentions), with a decent franchise you’ll find you get more bang for your marketing buck by having tested programs ready for you to implement, and by getting immediate leads from a national advertising and national accounts program. Add to that business training (especially for MSP models), sales training (ditto), tech support, vendor deals, a coaching team, and business tools, and most folks would find the $10k-$20k franchise investment to be money well spent.
Chip
Chip: Can MSPs really buy into a franchise for $10,000 to $20,000 US? Sounds like a very low price? What do MSPs receive at that rate???
Joe: I don’t want to put words in Chip’s mouth, but those numbers seem accurate as I remember them a few years ago (*full disclosure* – I used to work for Chip).
John: Thanks for the tactful note. I was skeptical of the numbers because I know retail food franchises — even really, really small ones — can easily cost $25K to $50K.
A word to the wise on any IT franchise:
In your vetting process talk to every single existing owner that you can and ask bluntly about profitability. The franchisor will provide a complete list of current owners if you get beyond the initial franchise process.
Get actual numbers and how long it took to reach those numbers. If you cannot get these answers move on.
If the numbers are “proprietary” or the existing owners will not give you firm answers, move on.
PROFITABILITY. Bluntly. Did I say PROFITABILITY? Well, yes, yes I did. You’ve been warned.
Remember: the owners have a vested interest in speaking highly favorably about their franchise experience because any negativity reflects on its value; i.e., their investment. So take things with your eyes open.
Franchisees with AT LEAST two years of experience should be included disproportionately in your talks. You need to get beyond the franchisees still in the honeymoon period (but talk to them too because they will have the best perspective on what the franchisor is doing NOW for training, etc.).
You need to know if they started their IT franchise business “from scratch” or if they had an existing IT business that they rolled over to the franchise model.
If the latter, you need to know how/if the franchisor has helped them get NEW clients and how/if the franchisor has helped them make more money off of their existing clients.
Again, specifics. The lack of specifics is a warning shot. Empty platitudes are a warning shot.
Franchisees who are “like you” who had/have a similar background as you are also imperative to speak to. Would they do it again?
Read between the lines…what are they NOT saying? Much like a new employer talking to a job candidate’s past employers.
Ask the franchisor: how many franchisees have quit or been let go since their inception? (Remember: if there wasn’t a lawsuit you won’t see it in a UFOC).
Ask the franchisees: how many franchisees are you aware of that have “disappeared” since you’ve been in the franchise? There are always some. Check this number with what the franchisor told you.
Also, if you cannot do the IT work yourself and need to hire a high-level IT pro on salary you better re-think the whole thing. You will be told that you can “manage” the IT people but the overhead may kill you, and ask how this will affect PROFITABILITY.
Of course if you’re just looking for a hobby-business and don’t care about profitability, have at it.
IT Entrepreneur: Thanks for the guidance. Profits, profits, profits. That certainly is the topic that matters most. One other thought: Many people buy franchises because they are out of a job.
Ask yourself: Do you want to start a business? Or are you merely starting one because you’re out of a job? If you’ve always wanted to start a business — if you sat in your old job writing secret plans to conquer the world — you might be ready to launch your own operation.