Why Most Franchising Firms Aren't Targeting New College Grads

Posted by: Nick Leiber on October 16, 2009

This is a post by guest blogger Don Sniegowski, the founding editor of the daily franchise news site BlueMauMau.donsniegowski.jpg

“There’s a youth movement brewing in the franchising world,” a recent story in The Wall Street Journal reports. Published in late September, the story explains that as boomers are retiring, franchise brokers and franchisors are putting increasing efforts into recruiting new college grads. But is this a real trend?

The story quotes a small number of franchisors, including WSI, a Canadian-based franchisor of Web consultants, which says it is aggressively seeking young people, and direct-mail franchising chain, ValPak (watch the video interview about its strategy below). But three or four people painting their noses blue do hardly a trend make.


The story does offer more evidence. Several franchise companies were quoted as saying they had joined the Veterans Transition Franchise Initiative, known as VetFran, in order to attract young veterans. But the program gives veterans of all ages a discount off initial franchise fees of member companies, so that doesn’t really track.

Probably the strongest evidence that the story provides is this:

“David Omholt, a franchise broker in Plano, Texas, says about a third of the 200 companies he works with have stopped giving age ranges for their target franchisee and are changing their marketing materials to minimize jargon and depict franchisees of all ages. ‘It’s quite a departure from the traditional mentality of who to recruit and how to recruit for new franchisees,’ says Mr. Omholt.”

Omholt, who is also Chief Executive Officer of The Entrepreneur Authority, a franchise brokerage firm that matches franchise buyers for franchising clients, sees a world that could be and points out to franchisors a class of students trained in entrepreneurship pouring out of American universities. He also sees an increase of young entrepreneurs loaded with cash. Omholt provides a persuasive argument because in this credit crunch it is quite believable that franchisors are now looking for any warm body to buy a franchise. But in a recent interview with BlueMauMau, he’s says most franchisors are not targeting new college grads. “To be very clear, my message was not that franchisors are no longer giving direction on demographics. The sweet spot still is, and probably always will be, 45- to 54-year olds.”

Still, Omholt sees a much better prepared college graduate who is better equipped to manage a business. "I see a proliferation of entrepreneurship curricula in higher education institutions, where such programs haven't been offered before," he says.

Omholt points out [family] trusts that are being handed down to twentysomethings, and that with proper mentoring and support systems, these young adults can be an asset to a franchise system. "If you look at the numbers in dollar volume of generation-skipping trusts from the rear view mirror looking at things going forward, it's unbelievable how much money is in play there with grandparents bequeathing money to their grandchildren to obtain a tax advantage status." He adds, "Some kids actually have some money to work with and do not need to go look for capital."

Jerome Katz, a professor of entrepreneurship at Saint Louis University's John Cook School of Business, confirms that the interest in entrepreneurship in his program has gone up. "Last year students went 60/40 for corporate over independent entrepreneurship. This year it has reversed." But Professor Katz reminds the franchise community that interest in entrepreneurship does not translate into interest in franchises. "How many grandchildren of the super rich want to start a franchise?" he asks. He answers, "If they want to do something, it is to start their own firm."

Katz suspects that such "trends" may actually be a wish list based on a select sample of students. "We are not seeing the pass down," he says, referring to a supposedly growing trend of older generations passing on wealth to their progeny that the progeny use to start a franchise. "In the past year the number of wealthy retirees or near-retirees has gone down. The cushion for wealthy retirees has shrunk. Yes, at the top of the economy the super rich still have more than they need, but they also have long-term wealth transfer and (legal) tax minimization schemes in place."

Still, Omholt isn't alone in seeing changing demographics, a growing army of entrepreneurial program graduates, and money that could be going into franchises. Jack Welch, big business guru and former CEO of GE, sees something too. Welch interviewed a Domino's franchisee. In a video that apparently is no longer posted online, Welch points out that there are many franchise owners in the process of retiring. Welch suggests that Domino's look at finding young, hungry new franchise owners and that it should for new B-school grads. That's quite similar to how the former CEO's old firm, General Electric, hires new talent. Welch offers this solution: "The biggest problem Domino's Pizza is facing is too many franchisees are nearing retirement age and there's nobody to replace them." The solution, he says, is to "...focus on MBA graduates who are sick of the corporate world and junior military officers."

Tim McIntyre, vice president of communications at Domino's Pizza LLC, tells Blue MauMau that the company worked with Welch primarily for the public relations exposure it would provide and as a way to get a day with one of the top business minds around. The Domino's spokesperson says the company's existing college recruiting program "recruits students for some of the more 'traditional' office-based disciplines, such as human resources, accounting and information systems." He observes, "The college recruiting program is in its infancy, and we have not launched any of the ideas specifically suggested by Jack and Suzy. We do have a team that is researching the viability of these ideas, though."

Having taught entrepreneurship classes from DePaul University to the University of Texas at El Paso, Craig Slavin, a 30-year veteran of franchising and CEO of Franchise Architects (a builder of franchise chains), emphatically replies, "Not at all," when asked if he sees a trend towards franchisors recruiting college students. He sees the changing demographics of a retiring franchisee base, but he doesn't think that franchisors are recruiting recent college graduates.

Says Slavin, "In all of the recruitment strategies I've developed for hundreds of companies, we've never targeted new college grads. They don't have real life work experience." He continues, "The MBAs are going to discuss theory while businesspeople are going to discuss practical application."

Dave Hood, president of iFranchise Group, a builder of start-up franchise systems, tells a story from his personal experience of a doctor in the Baltimore area who bought his son a business. His son opened up an Auntie Anne's pretzel shop in a prime retail location in Key West. "A few months later the son called to tell me that he was in Hawaii. He had basically abandoned the business." Auntie Anne's sent a field person to collect the operations manual. The facility was converted into a Chinese restaurant. "We looked at his books and he was making a lot of money.

He could have sold his store at a profit to a new franchisee, but he just left." Hood says that "When parents invest the money, their children don't have as much at risk." Hood doesn't see huge numbers of young college graduates buying franchises. "If I surveyed a hundred of our clients," he says, "a hundred of them would say they weren't interested in that market because of situations like the young franchisee at Auntie Anne's."

Professor Katz adds this insight: "I teach the independent entrepreneurship class, and talk about franchises as one more predictable source for going into business, but it is a rare student who is interested in it." He thinks the franchise industry has done a terrible job in marketing franchises to current entrepreneurs. The message is wrong. The industry "still is focused on the corporate refugee who was pushed out and longs for the good old days."

Don Sniegowski is the founder and editor of Blue MauMau, a daily business news site for franchise buyers and owner-operators. Previously, he led global field operations and franchise development for a quick-print franchising firm. Sniegowski also helped lead global publishing efforts for trade publisher Global Sources Media and led Asia-Pacific retail and operations for Franklin Covey.

Reader Comments

Carol Cross

October 19, 2009 12:15 PM

If there is a targeting of young graduates, etc.. I'm sure it is based primarily on accessing the money of the parents, etc. to provide the "venture" capital for the franchisors, who are the entrepreneurs.

Franchisees are merely resources for franchisors and not true entrepreneurs in any sense of the word, under long-term and often malicious "take it or leave it" contracts.

Hopefullly, Professor Katz points this out to his students. It is the franchisor who owns a business of his own and it is the franchisee who finances and builds the franchisor's business merely as a contracted resource. The franchisee may never make a dime in profits or even break even but the franchisor always profits, even if the franchisees never make a dime in actual profits.

The cheap labor and the cheap venture capital that promotes and supports franchising in the economy may be drying up, and franchisors and those who surround the industry are looking for new targets/new seed money.

The Patriot Express Loan Program of the SBA, initiated in 2007, is targeting VETS and their family members, to include those exiting from the Armed Forces RA, Reserve, and National Guard who may have to look at self employment because there are no jobs.

The 90% guaranteed SBA loans (sold on the secondary markets) and the special discounts to Veterans (to honor them?) render VETS and their family members targets of the franchise industry.

It would be better, of course, if those franchisors who offer VET discounts would instead provide the UNIT historical performance statistics of the units in their systems so that VETS and their family members and all others could make informed decisions about an investment in a franchise.

Let the Buyer Beware!
http://thegreatfranchisingrobbery.blogspot.com/

Gus

October 20, 2009 11:17 AM

"Let the Buyer Beware" is always good advice, but Carol you seem a bit jaded. There are bad apples in every industry and you have to do your homework. The best research is to talk to current franchisees to find out about the franchise's operations and on the franchisor - franchisee relationship (the FDD, Franchise Disclosure Document will list current franchisees).

Gus
Franchise Solutions

Bob Rodi

October 20, 2009 01:29 PM

Speaking strictly from the standpoint of a lender who has completed thousands of franchise transactions, the recent college graduate would be the least attractive applicant at this time. The question is how much "skin" do they really have in the game. I have seen too many situations where parents want to buy their bright new college grad a job and putting them in a franchise seems like a good idea--at the time. The chances that junior is going to stick to it and lead the solitary life of a franchisee getting up and running is remote at best. As a lender I want to see someone's hard earned equity going into the deal. Not money gifted by grandma or dad and mom. In that case the applicant has risked nothing of their own and, like the doctor's kid, they feel no particular compunction about making the decision that "it's just not what I really want to do", and they take off leaving mom and dad holding the proverbial bag. A more mature franchisee is a great choice for another reason. Failing or abandoning one's business becomse much less of an option as we get older. When you are 23 and just out of college you have your whole life to overcome failure. At 50 you don't have that kind of time so the motivation is vastly different between the two demographic groups

Bob Rodi
drlease@mountpleasantcapital.com

Carol Cross

October 20, 2009 03:20 PM

Sure Gus! But! ask yourself why franchising (the franchise investment) is treated uniquely under the law! Why should prospective franchisees have to do their due diligence with former and current franchisees who have no legal duty to open their books or to tell the truth to new prospects about the franchise! Why isn't the seller, who profits, responsible for disclosure to the buyer of the franchise?

Even the FTC admits that sometimes franchisees are paid by the franchisors to lie to new prospects and to beware! But there is actually no real oversight of franchising by the FTC and just a pretense of enforcing the FTC Rule prohibition of making "earnings claims" outside of the disclosure document and the actual contract.

The FTC Rule is a subsidy of franchisors that invites fraud and intentional torts because franchisors can sell franchises that have experienced low profitability and high failure rate of "founding" franchisees to the public without revealing this negative material risk factor to new buyers.

Why hasn't the seller, the franchisor, who profits greatly, even if the buyer never makes it to break even, been mandated to disclose the material risk factor of "unit historical financial performance statistics" to the new buyer of a franchise?

The truth is there are lots of "pigs" and "dogs" available for SBA loans and it appears that the FTC abets the frasnchisors to sell franchises as if they were almost risk free. Read Franchise Regulation Realities -- Deception or Patriotism in a Google Search for my opinion on this subject matter.

Most jaded franchisees or relatives of failed franchisees fade away into the sunset but not me!

http://thegreatfranchisingrobbery.blogspot.com/

Mark Tayar

October 20, 2009 07:13 PM

Good to see more opportunities for young entrepreneurs and more interest in entrepreneurship education.

Mark
http://hiremarks.wordpress.com

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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