NEW DIRECTIONS IN THE DEVELOPMENT OF MINORITY AND WOMEN-OWNED FRANCHISE UNITS

Matthew C. Sonfield Hofstra University

ABSTRACT One path to minority and women-owned entrepreneurship is via the franchise. Since the 1980s many large franchisor companies have seen the need to increase the number of their minority and women-owned franchise units and have established formal programs to develop such units. However, the success of such programs is not clear. More recently, several not-for-profit community economic development organizations have launched their own local franchise development programs. This paper provides a background on these corporate programs and then presents a detailed description of these newer not-for-profit programs. Implications for both small business consultants and their clients are discussed. INTRODUCTION In recent decades, an increasingly popular alternative path to traditional entrepreneurship and small business ownership has been the franchise. For minorities and women, this path has provided both strong challenges and opportunities. This paper sets the background for the issue of minority and women-owned franchises, discusses the formal and informal minority franchise development programs of various franchisors, and then focuses on a new effort in this direction - recently started programs of urban economic development agencies to foster minority and women franchisees. The implications and opportunities for consultants and their small business-person and entrepreneur clients are presented. Historically, the barriers to entrepreneurship and small business ownership have been especially high for minorities and women. Banks and other lending institutions have been less willing to provide needed funding than they have for white males, and similar difficulties have been encountered in obtaining credit from suppliers and loyalty from customers. These barriers have been the result of both conscious discrimination and more subtle societal perceptions regarding the potential business abilities of minorities and women (Hisrich and Brush, 1986; Sonfield, 1993). Thus, the advantages of franchising have proven particularly attractive to minorities and women. As a franchisee, a new small business owner obtains a network of suppliers and an established brand and product reputation and loyalty; and these strengths ease the comfort of lending institutions in providing needed funding.

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Still, minority and women-owned franchises continue to lag far behind their male whiteowned counterparts. While minorities today comprise more than one-fourth of the American population (Yago, 1999), a recent U.S. Small Business Administration study showed that less than 10 percent of franchises are owned by minorities (www.sba, 2000). CORPORATE PROGRAMS In the 1980s and 1990s, in response to general pressure from federal and state governments and from the public, and from more forceful pressure from organizations such as the NAACP and Operation PUSH (which carried implied threats of boycotts and other economic actions) and from highly-publicized discrimination lawsuits, many franchisors for the first time formally addressed the issue of minority and women representation among their franchisees. America’s largest franchisor companies, with a few exhibiting leadership, began to develop formal programs to increase the number of their minority-owned units. For example, one of the earliest was Kentucky Fried Chicken (KFC), which since 1982 has had a “Minority Franchise Program,” in which the company provides guarantees for bank loans, reducing the needed startup capital requirements for qualified applicants. Other large franchisors initiated similar programs, perhaps most visibly in the food service industry (including McDonalds, Burger King, Wendy’s, Ben & Jerry’s and Denny’s), but in a variety of other franchise-based industries as well (such as General Motors, Ford, Marriott, Hyatt, Conoco, Texaco and Athletes Foot). Most of these programs include mechanisms to ease access to startup capital and to provide franchise operational training, and many also provide franchise site assistance, minority peer support groups and other forms of assistance. While these programs initially targeted black entrepreneurs, they later added other minorities and women to their focus (Berselli, 1998; Colvin, 1998; Garcia, K., 1999; Laurie, C., 1999; Prewitt, 2000; Romney, 2000; Schumacher, 1999; Schwab. R. 2000; Sonfield, 1993; White, H. 1998; Zuber, 2000). Smaller and less well-known franchise companies have also made efforts to attract minority franchisees, some with formal advertising and programs and others through informal efforts. Examples include Wingstop Restaurants, Accor Economy Lodging, Tom’s Foods (snack food distribution) and HIS Gold Card (in-home shopping). These smaller franchise opportunities often are especially attractive to minorities and women because of their much smaller startup costs in comparison to large franchise opportunities. In 2000, total startup costs for franchises in such fields as janitorial services and lawn care can be less than $20,000 (Lawson, 1999; Romney, 2000; Sonfield, 1993). By the mid and late-1990s, a new incentive was added for these various formal and informal corporate programs. Suburban franchise locations had been largely taken, leaving inner-city sites as the best opportunities for future corporate growth. In addition, the pool of down-sized managers who had been the primary applicants for franchises in the past had dried up with the advent of a strong economy. Thus, franchisor companies, both large and small, now felt a financial as well as social pressure to look to the

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previously-shunned inner cities and to previously-ignored minority and women potential franchisees. A growing number of these companies have been seeking to attract new franchisees through minority and women-oriented magazines and trade fairs. The opportunities for minority and women entrepreneurs in franchising have never been better (Lawson, 1999; Romney, 2000). CORPORATE PROGRAM SUCCESS? Certainly these various corporate programs and efforts have increased the number of minority and women-owned franchise units among these companies since the early 1980s, but most of these numerical gains have slowed down in the past few years (Mowbray, 1998). Furthermore, some of these recently-recruited minority franchisees have voiced dissatisfaction with their franchise ventures. Such criticism generally involves the innercity locations in which their franchises are often located. It is claimed that these locations have higher operating costs than suburban sites; especially such costs as security, insurance, pilferage and employee turnover. Graduates of these corporate programs often claim that these extra difficulties are not recognized by the national franchisors (Sonfield, 1993). Furthermore, complainants say that the best suburban franchise sites are not offered to minorities, and that the real opportunities go to insiders - powerful franchisees who own a large number of units. In recent years, several high-profile lawsuits have been filed by disgruntled minority franchisees against such giants as Burger King, KFC, Wendy’s and 7-Eleven (Mowbray, 1998; Sonfield, 1993; Weil, 1999). The value of these corporate programs for women entrepreneurs has not been significantly questioned so far, perhaps because women have only recently been added as specific targets of these programs and the track record is too new to evaluate. NEW DIRECTIONS Partly in response to the mixed results of these corporate programs for minorities, a new type of minority franchise development program has emerged in several cities. In these programs, not-for-profit organizations work with national franchisors to create opportunities for minorities in underserved inner-city neighborhoods. Three major programs of this nature exist at this time: the Neighborhood Franchise Project in New York City, the Franchise Partnership in Chicago, and the Equity Participation Investment Program in Maryland. All three: 1) secure the participation of national franchisor companies, which agree to provide franchises to qualified applicants 2) solicit, screen and select potential entrepreneurs to become the franchisees 3) assist with franchisor-franchisee negotiations and specific site selection 4) secure the participation of financial institutions, to provide assistance for startup costs, in some combination of low-cost debt and/or equity financing

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5) provide on-going support and technical assistance to increase the chances for business success. These new not-for-profit franchise development programs differ from the earlierestablished corporate programs in several ways. Their primary objective is to strengthen economically under-developed inner-city neighborhoods by bringing in types of businesses not currently there and by creating new job opportunities for neighborhood residents. In contrast, the corporate programs’ primary objectives focus largely on their own franchise networks, with the goal to simply increase the number of minority- (and women-) owned franchise units. Also, these not-for-profit programs are not linked to a specific franchisor or type of business, but rather try to match the product or service to the needs of the neighborhood. Furthermore, the franchisors chosen for these programs are generally lesser-known ones without formal programs of their own (Lamar, 2000; w w w . m m g g r o u p . c o m / M S B D F . html., 2000; www.liscnet.org, 2000; www.franchisepartnership.org, 2000). A more detailed description of two of these programs will provide a better understanding of how they work. New York City’s Neighborhood Franchise Project (NFP) was established in 1997 and is sponsored by the nationally-oriented Local Initiatives Support Corporation (LISC). The NFP has secured the cooperation of the Deutsche Bank (formally Bankers Trust Company) and the Ford Foundation to provide financing assistance for the program. Furthermore, the NFP has obtained the commitment of 18 franchisor companies which are prepared to entertain proposals for franchise units within economically underdeveloped communities in New York City. Discussions with a number of other companies are currently in progress. The formal goals of the NFP are to: 1) bring quality goods and services to low- and moderate-income communities 2) make franchise opportunities available to talented entrepreneurs 3) create jobs for neighborhood residents. Because of the size of New York City, the NFP chooses to have local “community-based organizations” (CBOs) perform the actual franchise development services. These CBOs solicit and select the prospective franchisees and franchisors and provide the various aspects of on-going assistance; the NFP provides the financial assistance. The NFP offers three alternative deal structures to the CBOs and prospective franchisees: 1) the CBO acts as a deal packager with no ownership or financial role in the venture 2) the CBO acts as a facilitator and makes a limited (no more than 10%) equity investment in the venture, but is not required to guarantee the financial obligations of the business 3) the CBO is a financial partner in the venture (more than 10%) and guarantees the obligations of the business.

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In all three structures, the CBO assists the entrepreneur(s) in the application process and in developing a formal business plan, for which it receives a “development advisement fee” from the NFP. The CBO may also provide other expert services, such as generating community support through special marketing initiatives, and again receive payment for these services. The CBO will have a first-source hiring agreement with the business, referring job candidates and monitoring the entrepreneur’s compliance with local hiring goals. The NFP provides up to 80% of the funds needed to launch the venture, as loans and/or equity. The entrepreneur(s) sign personal guarantees of loan repayment and at least one must be designated the full-time day-to-day operator of the business. The entrepreneur(s) obtain their financial returns in the form of annual net profits. In its three years of operation, the NFP has set up two franchise units (a Sterling Optical in Harlem and a Sign-A-Rama in Coney Island) and is currently developing a third. While other franchisor companies have voiced an interest in participating in the program, the primary impediment to establishing more franchises has not been funding, but rather has been finding qualified prospective entrepreneurs. Such prospects must not only have strong business ownership or management experience, but must also be able to provide at least 20% of the startup capital from personal financial resources. The majority of entrepreneur recruitment efforts to date have not reached fruition (Brown, 2000). Chicago’s Franchise Partnership (FP) operates quite similarly to New York’s NFP. Started in 1999, it has several startup enterprises soon to open: two PostNet International franchise units, a Coffee Beanery, and a Sign-O-Rama. As with the New York program, the FP’s most significant problem is finding qualified prospective franchise owners. The FP is especially concerned with bringing in the types of businesses needed by the community – not additional fast-food units. Because the FP (unlike the NFP) requires the franchisor companies to contribute to the costs of the program, it has had some difficulties in recruiting the types of franchisors it is looking for. In Chicago, franchisee applicants are required to put up 10% of the total franchise unit investment, and typical unit startup costs to date have been about $100,000 to $170,000 (Jackson, 2000). CONCLUSIONS This new form of franchise establishment assistance by not-for-profit organizations provides an important opportunity for minority and women small business-persons and entrepreneurs. Many prospective franchisees whose financial resources or business objectives are too small for existing corporate franchise development programs (major fast-food chains, etc.) may now be appropriate candidates for these new programs. Similarly, smaller franchisor companies without franchise development programs of their own may find these not-for-profit programs a way to add minority and women-owned units to their franchise network. However, it appears that few qualified candidates are aware of these programs, as a lack of such candidates has been the programs’ major growth constraint to date. Consultants

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to small businesspersons and to entrepreneurs with venture creation objectives should make themselves aware of such programs in their area, convey this information to their clients and, when appropriate, assist their clients in connecting with these not-for-profit organizations and with the application processes and follow-up assistance required by them. Consultants without such local programs can also work with regional economic development agencies to create such programs. Most states, counties or cities have some sort of economic development agency and, while few now have programs which focus specifically on franchise development, the concept of such programs can be brought to their attention. Small business consultants may be in a position to play a role in the establishment of this new type of franchise development program in their communities.

REFERENCES Berselli, B. (1998). Choice moves on diversity. The Washington Post, March 4, p. C12. Brown, A. (2000). (Director of Neighborhood Franchise Project, New York City). Telephone interviews, June 2000. Garcia, K. (1999). Franchises seek out latinos. Hispanic, 12(11), p. 70. Hisrich, R. & Brush, C. (1986). Characteristics of the minority entrepreneur. Journal of Small Business Management, 24(4), 1-8. http://sba.gov/ADVO/research/rs193.pdf. 2000. Jackson, M. (2000). (Director of interviews, June 2000.

Franchise Partnership, Chicago).

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Lamar, H. (2000). Building urban communities. Black Enterprise, 30(11), p. 67. Laurie, C. (1999). Franchisors meet challenge of growth, change. Franchising World, 31(2), 11-14. Lawson, J. (1999). Women and minorities strike franchising gold. Franchising World, 31(5), F5-F8. Mowbray, R. (1998). A fair shake. Houston Chronicle, Dec. 13, p. 1. Prewitt, M. (2000). Minority franchises make gains at chains. Nation’s Restaurant News, 34(6), p.1. Romney, L. (2000). Small business: special report on franchising. The Los Angeles Times, Feb. 23, p. C1.

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Schumacher, M. (1999). Ben & jerry’s brings sweet deal to pr. george’s. Washington Post, July 21, p. MO5.

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Schwab, R. (2000). Conoco loan helps local black group. Denver Post, Jan. 26, p. C1. Sonfield, M. (1993). Progress and success in the development of black-owned franchise units. The Review of Black Political Economy, 22(2), 73-87. Weil, J. (1999). KFC and black franchisees spar over dallas expansion. Wall Street Journal, Set. 22, p. T1. White, H. (1998). Laying out the welcome mat. Black Enterprise, 29(3), p. 17. www.franchisepartnership.org, 2000. (The Franchise Partnership, Chicago) www.liscnet.org, 2000. (The Neighborhood Franchise Project, New York City) www.mmggroup.com/MSBDF.htm, 2000. (Equity Participation Investment Program, Maryland) Yago, G. (1999). Capitalism is not just an ‘ism’ for minority businesses. Houston Chronicle, Feb. 1, p. 21. Zuber, A. (2000). Minority franchises prosper with help from McD support. Nation’s Restaurant News, 34(7), p. 26.

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