Discerning investors who want unvarnished information about a franchise before buying often peruse blogs for franchisees’ gripes or concerns. Now, there’s another item to consult: the franchisee-satisfaction survey.

At least two firms, Franchise Research Institute and Franchise Business Review, query existing franchisees in dozens of systems on their satisfaction levels and publish the results of those polls on their Web sites. Such research – typically funded by the franchise itself – may be a telling indication of how well a franchise system is working, or whether it should be avoided. The reports can be purchased for $24.95 on Franchise Research Institute’s site but are available for free on Franchise Business Review’s if franchisors agree to post them.

Both firms survey franchisees on a confidential basis, to assure them they won’t be identified and possibly punished for expressing their true feelings. Both also seek to survey most of a system’s franchisees to verify that the opinions are representative rather than those of a few grouches.

Although the questions they ask are similar – including the crucial “would you recommend this franchise to others?” — the firms’ approaches differ. Franchise Research Institute charges the franchiser involved before undertaking the survey; Franchise Business Review collects a fee after doing the research, if the franchiser wants to see what it found.

Both firms affix stamps of approval on franchisers whose franchisees generally endorse their systems. The Franchise Research Institute awards a “world-class franchisee” seal whereas the Franchise Business Review hands out “Best of the Best” citations.

Franchise companies fund the surveys partly to use the results – if positive – to recruit new franchisees. But often, the surveys can reveals cracks in the system that’s useful information to proactive franchise managers and potential investors alike.

“Some surveys will give extremely bad news to a CEO and a company’s owners,” says Jeff Johnson, president of Franchise Research Institute in Lincoln, Neb. One common issue is a franchise system that’s rapidly growing. “That causes all kinds of concerns among franchisees,” including haphazard support from field personnel, he says. If a franchise isn’t listed on the Institute’s site, a potential franchisee should ask the franchiser whether it has been graded, and what the results were, Mr. Johnson adds.

Eric Stites, who founded Franchise Business Review and runs it out of an office in Kittery, Maine, says that occasionally a franchiser he approaches with a survey pitch will turn him down. “If they have an issue they will try to squash a survey,” he says.

While he gave out 115 awards to franchises last year, and posts some of them on his site, Mr. Stites says that 80% of the franchises operating today “are simply average or below-average business opportunities.” Fast-food restaurant and automotive-related franchises often score near the bottom in his franchise-satisfaction surveys, he adds. Even so, his site recently posted a list of 11 “top food franchises.”

“A lot of dissatisfaction in franchising comes from [franchisers] not meeting initial expectations, which are typically set during the sales process…by overly-aggressive salespeople, unfortunately,” Mr. Stites says. On the other hand, companies with the highest franchisee satisfaction scores typically “don’t oversell their systems – in many cases they undersell it — and are very selective in their recruitment process,” he says.

For their part, franchisers who get disappointing approval ratings say the surveys often guide their decision-making and can lead to better operations.

For example, when Great Harvest Bread Co. , a Dillon, Mont., bakery chain, got a significantly lower score in its Franchise Research Institute survey several years ago than it had previously, the company’s executives realized they had responded too slowly to the low-carb craze.

“We had taken the position that we sell carbohydrates for a living,” recalls company president and chief executive Mike Ferretti. “But our customers were saying, ‘We’ll go someplace else. Many of us are no longer eating what you sell.’ ” As a consequence, the chain introduced a low-carb bread that remains a popular item. “Franchisees were right about our head-in-the-sand attitude,” Mr. Ferretti says. That experience “taught us a very valuable lesson.”

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Have you been pondering whether franchising is a good fit for you? If you’re similar to most entrepreneurs, you’re not quite sure if your involvement with a franchise is worth the cost. While answering the question of whether or not you choose a franchise over developing and building your own concept is your decision, it’s definitely imperative for you to fully weigh the pros and cons before you decide which way is best for you.

It is true that there are fees associated with the initial startup of a franchise, but that fact by itself shouldn’t dissuade you from deciding to venture this direction. After all, there are expenses related to the startup of any type of business. You need to ask yourself what you are getting in terms of business support and marketing advantages when you choose to buy in to a franchise.

Three ‘Pros’ for Franchising

1. You Gain a Healthy Head Start with Brand Name Recognition
If you choose to start your business from the bare ground, you’re at a disadvantage in terms of name recognition from the beginning because no one will ever have heard of your brand before. While you can surely raise awareness for your company’s namesake, it takes time, energy, and money. When you open a new locale of a known franchise, you’re already ahead in the race when it comes to name recognition. A major bonus associated with franchise ownership is the simple fact that prospective and existing customers are already likely to know about your brand names and company before you even open up for business.

2. Solid Support Channels from Corporate
Being an entrepreneur can turn out rather lonely. When you’re launching a small business by yourself– or even with a few partners – you end up on your own when it comes to deciding what to do first, next, and so on. In franchising however, although you’re an independent small business owner, you have teams of people in place at the corporate offices with a duty to assist you, as well as other franchise owners in other markets. They have experience with the same issues you’re facing and can offer ideas, help, and advice. So, even though you have the autonomy of entrepreneurship, when you own a franchise you aren’t really all by yourself.

3. Smart Preparations Can Lead to Quick Success
There are a handful of ways through which opening a franchise can build a platform for success in your favor. First, the business has already experienced success elsewhere, or it wouldn’t be a franchise at this point. You already know that the concept is viable when you choose to open a franchise, because it’s already operating in another locale. The system works; it’ll be your choice whether or not it’s a workable business for your market and to make it succeed. Further, overall, franchise start-ups have a much higher success rate than other small businesses. Trust what works, what has always worked and those whose success depends on yours.

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To get to the root of why the United States is struggling toward a jobless recovery, look no further than the franchising business.

In franchising, a company lends its trademark and business system to an owner-operator who pays royalties for the right to use them. Starbucks (SBUX), Quiznos, Jenny Craig, Ace Hardware, Maaco, Pakmail – all are franchise businesses. In the U.S. there are more than 900,000, directly employing more than 11 million people.

From 2001 to 2005, the collective payrolls at franchise operations grew by 22%, to $279 billion. But that growth rate, with its healthy spin-off of jobs, has since ground to a halt, yet another byproduct of the credit crisis that produced the recession some experts tell us is nearly over.

“The flow of credit to franchisees has essentially ceased,” said Matthew Shay, chief executive officer of the International Franchising Association. “A number of banks have either left the market completely or stopped lending to small business. Without credit for people to get started in business and then to operate a business in the short term before it becomes profitable, that makes things very difficult.”

In January, the IFA predicted a loss of 10,000 franchise businesses this year, jettisoning more than 200,000 jobs. That dire forecast was predicated on the estimate that access to credit would be down by 25%, which now may seem like wishful thinking.

“We recently updated that assessment,” Shay said last week. “We now think access to credit is down closer to 40% this year. It’s become worse. We are leaving tens of thousands of jobs on the table.”

Franchise consultant and blogger Joel Libava, aka “The Franchise King,” is in the business of “strategic matchmaking,” lining up potential franchisees with the many thousands of companies that dole them out.

“I was talking with a major Cleveland-area lender recently,” Libava said. “I asked him ‘If I sent you someone with a million dollars who was looking for a $250,000 loan for a franchise - putting up $100,000 of his own - what would you tell him?’

“He told me he’d pass,” Libava said. “He said ‘We have no interest in looking at any start-ups now. There’s too much risk.’”

Libava said he’d been hearing similar things from bankers for more than a year now, “but I’d never heard it said as strongly. It’s definitely a new trend going on this year. Banks just aren’t very interested in loaning to startups.”

Businesses with fewer than 20 employees account for 25% of all jobs, but in the 2003-2007 economic expansion, they generated 40% of the job growth, according to Mark Zandi, senior economist for Moody’s Economy.com.

“In their recent efforts to recharge the economy, policy makers have all but forgotten small business, finding it both easier and more visible to help large multinational firms,” Zandi told the New York Times this week. “Unfortunately, though, big business can’t provide the jobs needed to power the economy forward.”

PricewaterhouseCoopers prepared a study for the IFA in 2006 that concluded new franchise growth over the previous five years had generated 140,000 new businesses and 1.2 million jobs.

“Franchising now provides more jobs than many other sectors of the economy, including the durable goods manufacturing and financial activities sectors,” Shay said. “It is clear that franchising is a critical engine of economic growth in the United States powering local communities across the country.”

Many people think only of fast-food when they think of franchises. But the Franchise Association now lists more than 75 different categories to describe its members. Franchises range from advertising/direct mail to construction to dating services to home inspection to security systems to video rentals. Printing and copying centers, maid services, computer repair, lawn-care services, real estate, lodging and travel agencies. More than 400 U.S. franchise systems operate internationally. Subway alone has more than 26,000 franchises in 84 countries.

Franchising is attractive to many entrepreneurs because it offers many of the advantages of a partnership. According to an IFA brochure: “Franchising means being in business for yourself but not by yourself. Whether it’s accounting and financing, advertising and public relations, personnel management, purchasing, or inventory control, franchisors are there to provide ‘hands on,’ one-to-one assistance.”

For a potential franchisee, the start-up costs can range from $20,000 or less, to more than $1 million. Seventy percent of franchisors charge an initial fee of $40,000 or less, and the average investment, excluding real estate costs, is between $350,000 -$500,000.

But in the current environment, lining up the money is not for the faint of heart. Consider the travails of Tom Drennen as he struggled to open a Beef O’Brady neighborhood pub in Newport, Ky., last year. The franchise operator advised him to apply for a $500,000 loan with New York-based CIT (CITGQ), then the nation’s largest National Business Association lender.

“They were very strict,” he recalled this week. “I had to put 15% down, I had to get an architect signed up, I got general contractor bids and acquired a lease that I had to personally guarantee.”

By October 2008, Drennen said all of CIT’s loan requirements had been met, and the loan was set to close in two weeks.

“Then CIT called me and said ‘We’re freezing all our loans, we can’t lend you the money,’” he said. “I asked about all the commitments I had lined up, and they said there was nothing they could do.”

Because he already had signed the lease to get the CIT loan, Drennen began paying $5,000 monthly rent on an empty building.

“I hit the streets,” he recalled. “I hit up every single bank in northern Kentucky and southern Ohio, from nationally known to community banks. They were all so scared. They didn’t want to do any startups, and told me restaurants were especially risky. At least 30 banks turned us down. I tried to find creative ways to get out there, finally reaching real deep into my pockets.”

After reading about the federal stimulus money being funneled to banks, Drennen made a second round of all the lenders, this time putting up 60% of the money himself.

“They still kicked me out” he said. “They wanted nothing to do with a startup. It was really confusing, I felt like I was misled. I thought the stimulus money was put there to get back out to the public.”

Finally, Huntington Bancshares (HBAN), a regional lender out of Columbus, Ohio, agreed to lend him $100,000. Through his research, Drennen found out about an economic development district that had been formed in Newport in the 1970s after a flood.

“It was a revolving fund that was still operating” Drennen said. “They got with the bank and both went in for 20%.”

After paying nine months’ lease on the vacant property, Drennen opened July 27.

“We’re doing excellent - me and the 40 employees I hired,” he said.

Tom Drennen at his storeHis advice: “Be resilient. If you are someone who gives up, this isn’t for you. You’re gonna be turned down many times, but realize they are giving you constructive criticism all the time that you can use with the next bank. Each turndown made me that much more determined to prove them wrong.”

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Feature Story: The State of the Current Domestic Franchise Market

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Grow Your Franchise Abroad Without Debt & Why You Should Act Now SBA Report: October 30, 2009   The recession has hit franchise owners particularly hard, with the Small Business Administration (SBA) reporting record loan default rates for 2008-2009. According to the SBA, individuals who took on SBA loans to finance a franchise had a 43% higher failure rate than in 2007.   In total, those franchise losses cost the SBA $93.3 million last year - nearly 170% higher than the year before.   Since 2004, franchise loan defaults have increased by nearly 10% (from 3.1% to 13.4%), highlighting that franchise owners have had an increasingly difficult time making a successful go of their new ventures.   As international franchising consultants, we at IFG approach this issue with a “Learn from the mistakes of others” point of view.  While it is undoubtedly disturbing to see these statistics; and while it may seem that these numbers indicate franchising to be a risky endeavor, it is imperative to remember a few key factors: These franchises represent a minority in the worldwide market These concepts created debt at the outset, starting out in the red We can learn a valuable lesson from their failures without risk to ourselves Franchising as a business model is superbly secure and expansion-friendly Our focus is solely international in scope, meaning franchise expansions in which we are involved do not rely on any sort of lending, credit or debt.  It is simply not a viable or economical practice for the international franchising markets we serve.     Because international franchise expansion abroad does not involve debt or outside lending practices, we enjoy the peace of mind that some of the following list of franchises might not.   These brands had the highest SBA loan failure rates in the United States in 2008.        1. Noble Roman's Pizza   Billing itself as "The Better Pizza People," this Indianapolis-based franchiser has had a tough time selling that proposition to customers. While the company reported a 30% net income increase in Q1 of 2009, Q2 total revenues were down more than $500,000 from the comparable period in 2008. Maybe that's why 53% of all owners with SBA loans defaulted in 2008.           2. PJ's Coffee and Tea Café PJ's Coffee and Tea Café started out as a small business in New Orleans 30 years ago and only recently began selling franchise rights across the south, southeast and southwest. It might want to stick to Cajun country - 50% of the franchisees failed on their SBA loans last year.           3.  Super Suppers At the height of the market, working families expanded their spending to include luxuries such as cleaning services, lawn services and even assemble-your-own dinner services.   Super Suppers jumped on the concept and its franchise growth was exponential between 2005 (40)to 2006 (152), and 2007 (206). However, the growth stalled with no new franchise owners coming on board in 2008, and existing owners with SBA loans began failing at a quick pace - 42%, to be exact, in 2008.     4. Figaro's Italian Pizza Figaro's has been in business for 28 years, but most of its franchise owners aren't likely to reach that same anniversary. One-third defaulted on their loans, unable to grab enough of the industry's $32 billion in annual revenues.   5. New York NY Fresh Deli Perhaps it was the low single-site franchise fee ($17,500) that attracted new business owners, but it was low revenues that led to closed doors. Thirty-one per cent defaulted on SBA loans in '08   6. Amazon Cafe This franchiser offers smoothies, wraps, salads, soups, juices and more, but apparently not enough more to keep all operators in business. Thirty per cent failed in 2008, and more than 52% have defaulted on their SBA loans since 2000.     7. Simple Simon's Pizza Simple Simon's grew from one store in Tulsa to a network of 220 restaurants nationwide since 1982. However, nearly 30% of store owners who took on an SBA loan to finance the start-up have defaulted. Perhaps selling pizza isn't quite so simple after all.     8. Snip-Its The Snip-Its children's hair salons ranked 30th on the Franchise Times' 2007 list of 55 fastest growing franchises, but two years later that growth has stalled. Thirty per cent of store owners with SBA financing failed to repay their loans in 2008.   9. U Build It Seeking to grab a share of the market that made Lowe's and Home Depot household names the U Build It franchise offers owners an opportunity to serve as "construction consultants" for DIYers interested in building or renovating their own homes. But when the housing market collapsed, it shouldn't come as a shock that 27% of their franchisees reneged on their SBA loans.   10. Bellacino's Pizza If you're a Facebook user, you can become a Bellacino's Pizza "fan." Unfortunately 26% of Bellacino's owners that took on SBA financing couldn't get enough regular fans to stay current on their debt payments. That number closes in on 30% dating back to 2000.   11. Blockbuster Video While Blockbuster was able to fend off brick and mortar competitors, it has struggled to maintain market share since Netflix and Redbox changed the rules of the game. In 2008, one in four store owners with SBA loans failed to repay their debt; that number jumps to a sobering 38% since 2000.   12. Pizza Factory If this list proves anything, it should be that entrepreneurs might do well to avoid pizza franchises. Twenty-four per cent of Pizza Factory owners took a pass on repaying their SBA loans in 2008, and that number jumps to 43% if you look back to 2000.     13. Pro Golf With a rising unemployment rate, workers aren't knocking off early to hit the links. Perhaps that's what led to 24% of Pro Golf franchise owners defaulting on their SBA loans. But the fact that 64% of all owners have failed to repay their loans since 2000 makes you think that perhaps the business model is the real news, not the recession.   14. Conoco Service Station While ConocoPhillips Company is a Fortune 500 company, its service center franchise owners (more than 3,100 operate under the Conoco, Phillips 66 and Union 76 brands) are struggling. More than one in five (22%) have defaulted on their SBA financing commitment.   15. Keva Juice Keva's product isn't a "blendsation" everywhere. Twenty-two percent of these smoothie store owners didn't raise enough revenue to repay their SBA loans last year; more than one in four (26%) have defaulted on their loans since 2000. There you have it. So what is the moral of this story? Most foreign master franchisees do not use debt AT ALL. Glean a lesson from the experiences of other entrepreneurs and pursue expansion avenues abroad while the domestic U.S. market recovers. Good business practices have good reasons behind them.  Likewise for the bad ones.   To learn more about franchising internationally and avoiding the costly repercussions of debt, click here.

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