Hanging a shingle

Recession has many professionals ready to explore opportunities, challenges of franchises

John Gerth opened Suremark Signs with his sons, Daniel, left, and Nathan, three years ago, favoring the support franchises provide to new businesses.

With many professional workers being laid off and few jobs to land in, some may be thinking about buying a franchise and working for themselves.

Some local entrepreneurs with means or low start-up costs have found success — and a second career — in franchising.

“Owning your business isn’t for everybody, but with a franchise it’s not like you start from scratch with no assistance and no guidance,” says John Gerth, owner of Suremark Signs, now in its third year of business. “I never wake up, look at myself in the mirror and say, ‘Why did you do this?’ ”

But franchises aren’t recession-proof. Defaults on franchisee loans guaranteed by the U.S. Small Business Administration jumped 52 percent in the year ending Sept. 30, 2008, according to a widely publicized report. Sales of franchises are down in many states this year.

And a tight lending market has put a severe squeeze on the financing needed to start up a business.

Gerth purchased Suremark, a Sign World business, as an investment after selling his share of Crown Tent and Awning, a family business where he worked for 28 years. He wanted a business he could start with his two sons and pass on to them after retiring.

Today, his oldest son Nathan Gerth works with him as a sign maker and computer consultant, and younger son Daniel Gerth is a manager.

After spending much of the first year building a customer base, the Gerths saw a 40 percent growth in their second year and recently moved the business to a larger warehouse on Nolensville Pike.

“We’ve had as much business as we can handle,” Gerth says. “There’s no way to tell right now about this year, but we’re still floating and have enough business to maintain our interest.”

Gerth paid about $125,000 for training, equipment and computers. Sign World also provides online and telephone support, as well as a network of other owners who provide advice and support.

Gerth and sons brought the right ingredients: business education and experience and ample capital, says Daniel Aronoff, head of FranNet of Middle and Eastern Tennessee, a service that helps match people with appropriate franchise opportunities.

But that’s not true of everyone.

“I’ve gotten more inquiries, but they’re not as strong leads as they were a year ago,” Aronoff says. “You want people to get into business because they’re looking for more independence, more control, not because they don’t have any other options. I have some people calling who have no money.”

And money is increasingly hard to borrow. When times were good, home equity was a common source of collateral, according to the SBA. Now that so much paper wealth has vanished with diminished home values, banks are reluctant to lend to people without liquid assets.

Franchise costs include a franchise fee, usually tens of thousands of dollars, money for equipment, inventory and location buildout, if necessary, as well as enough working capital to pay salaries, utilities and other expenses.

Aronoff works mainly with franchises that cost $50,000 to $300,00 to open.

Brick-and-mortar companies tend to cost more. To open a 4,500- to 5,000-square-foot Jason’s Deli location, franchisees shell out up to $900,000 for location build-out, equipment, fees, inventory and administrative and marketing costs.

Jason’s Deli franchisee Jay Tortorice plans to open several new delis in Nashville within the next few years and is scouting locations in Brentwood, Green Hills, Belle Meade and Hendersonville.

His franchise company Jen-Tex currently owns 12 Jason’s Deli outlets, including locations in Franklin, Nashville and Murfreesboro.

“It’s an ambitious goal, but I don’t think there’s ever been a better time to expand,” Tortorice says. “We have strong relationships with our banks (Fifth Third, Regions Bank and the Bank of Nashville), good people and good locations.”

Aronoff, also a career coach, puts franchise candidates through a four-step process that assesses their financial and personal readiness to take the risks inherent in being a business owner.

For John Gerth, the rewards are more than financial.

“I get to do something that a lot of men would probably like to do and don’t get to do, and that is to work with your sons,” Gerth says. “That has been the most satisfying part.”
SIGNS OF THE TIMES

• Nearly 10,000 U.S. franchises could close by the end of 2009, eliminating more than 200,000 jobs.
• Total franchise borrowing is expected to fall to $8.5 billion in 2009, a drop of 25 percent from 2008.

Hardest hit sectors:
Commercial, residential services -3.5 %
Real estate -3.2 %
Lodging -2.6 %
Business services -2.5 %

Sources: PricewaterhouseCoopers, International Franchise Association
Nashville Business Journal – by Jeannie Naujeck Staff Writer
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