The lure of a franchise meets hard fate of reality

Posted: September 04, 2012

When Rick Kimsey decided to start a business, a franchise seemed the best way to go. Buying a Doctors Express urgent-care facility meant he didn't have to start from square one - he had a concept and a service to sell.

Urgent-care centers treat common non-life-threatening medical conditions such as colds, broken bones, rashes, and stomach ailments, usually without an appointment. It didn't matter that Kimsey had no medical training.

But what sounded like a great plan wasn't so easy. Financing was nearly impossible to get after the 2008 financial crisis. Kimsey's home-equity line of credit was frozen. Then six banks turned him down for a loan.

"The rug was pulled out from under me," he said. It took more than a year before he was able to close the deal.

The tough economy has made the prospect of operating a franchise attractive to the unemployed, to workers who don't want to wait to get knocked off the corporate ladder, and to those looking for a new way to generate income.

But first-time franchise buyers are finding that it's harder than they expected to cobble together the money needed to get their businesses off the ground. Lenders are rejecting them because of their inexperience or because the franchises they're buying are relatively young, not as well-known as brands such as McDonald's and Jiffy Lube.

Kimsey liked Doctors Express, after nearly 20 years in the wireless-telephone industry, because health care is among the fastest-growing franchise segments.

"I was looking for a sizzling sector, like cellphones were in the '80s," he said.

He had enough saved for the $55,000 franchise fee to the parent company, and he won approval to open the franchise in Sarasota, Fla. He needed $1.2 million to cover $250,000 to $300,000 in construction costs, $150,000 for equipment, and the rest for working capital.

The banks that rejected his loan application gave similar reasons, he said: "It's a fairly new franchise. This isn't McDonald's, so we don't have 70 years of history."

Eventually, he did get a $575,000 Small Business Administration-guaranteed loan. He tapped into his savings and about $500,000 from his 401(k), the entire account, for the rest.

"I've got to build this up. It will be my retirement," Kimsey said.

Franchises have suffered along with other small businesses in the last five years. The number of individual Dunkin' Donuts shops or Days Inns in the United States fell by 37,790, or nearly 5 percent, between 2008 and 2011, the International Franchise Association says. The trade group estimates that the number will rise this year for the first time since 2008, gaining 1.7 percent to 748,680. But that's still more than 3 percent below 2008's 774,016.

The reasons: The recession made many people wary about starting businesses. Also, thousands of franchises closed: auto dealerships; real estate brokerages; chain restaurants such as Steak & Ale.

"Prior to 2008, there was the general view of franchisees and the lending community that franchising was a fairly sound bet," said Darrell Johnson, CEO of the research firm FRANData. "The rising economic tide would float all boats, and one brand might not be as strong as another, but everyone was going to do OK."

Now, lenders are asking more questions about the brand, Johnson said.

Christian Brantley and Jessica Mitchell were able to finance the $15,000 franchise fee and construction costs themselves when they bought a Snap Fitness gym near Willis, Texas. But because of their age - Brantley was 23, Mitchell 24 - they were turned down for $170,000 in financing to lease about 75 treadmills, stationary bikes, and other equipment.

Brantley recalled thinking, "We are going to have a yoga studio for a year."

The solution: Mitchell's father, a real estate developer, agreed to be their guarantor on an application with another equipment-maker.

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