Last updated: February 16. 2013 9:36PM - 113 Views

Story Tools:

Font Size:

Social Media:

NEW YORK — When Rick Kimsey decided to start a business, a franchise seemed like the best way to go.


Buying a franchise — in his case, a Doctors Express urgent care facility — meant he didn't have to start from square one. The business came with a concept and a service to sell. For many people, the facilities are more appealing and less expensive than a trip to the emergency room. Kimsey just needed to get the franchise up and running, and then operate it. It didn't even matter that he had no medical training.


But what sounded like a great plan wasn't so easy. Financing for the business was nearly impossible to get in the aftermath of the 2008 financial crisis and the recession. Kimsey was dealt his first blow when his bank froze his home equity line of credit. Then six banks turned him down for a loan.


It took more than a year before he was finally 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 others looking for a new way to generate income. But first-time franchise buyers are finding 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 and not as well-known as established brands such as McDonald's and Jiffy Lube.


Kimsey had enough of his own money saved for a $55,000 payment, known as the franchise fee, to the parent company. And he won approval to open the franchise in Sarasota, Fla. He needed $1.2 million to cover between $250,000 and $300,000 in construction costs, $150,000 for equipment and the remainder for working capital.


The banks that rejected his loan application gave similar reasons for saying no, he says.


"It's a fairly new franchise. This isn't McDonald's, so we don't have 70 years of history," Kimsey says. Doctors Express was founded in 2005 and has 54 locations.


And even though the company doesn't require that franchisees have medical training, the banks were uncomfortable with the idea.


The banks liked Kimsey's business plan, but bank officers told him that because he wasn't a doctor, "that's going to be a problem."


There was more: "We don't have a lot of assets. It's not like I have a million-dollar CAT scan" that could be used as collateral, he says. He leases the building and equipment like an X-ray machine.


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


"I've got to build this up. It will be my retirement," Kimsey says of his franchise. "Then I'll hand it over to my children."


Franchises have suffered along with other small businesses in the last five years. The number of franchises in the U.S. — for example, an individual McDonald's, Dunkin' Donuts shop or Days Inn — fell by 37,790, or nearly 5 percent, between 2008 and 2011, according to the International Franchise Association. The trade group estimates that the number of franchises 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 number of franchises dropped as the recession made many people wary about starting a business and because thousands of franchises closed


"Where it's really having its hardest effect is the aspiring entrepreneur who doesn't have that track record or that relationship with the banks," says Stephen Caldeira, president of the International Franchise Association.


But banks are also wary about franchises they're unfamiliar with — the problem that Kimsey ran into. That's a huge change from before the recession.


"Prior to 2008, there was the general view of franchisees and the lending community that franchising was a fairly sound bet," says Darrell Johnson, CEO of FRANData, a research firm. "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 says. That's happening even in some of the franchise industries that are most popular now, including health care, elderly care and gyms and other fitness companies.


Comments
comments powered by Disqus



Featured Businesses


Poll



Info Minute



Gas Prices

Wilkes-Barre Gas Prices provided by GasBuddy.com