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More small businesses are entering franchise market

Firms are exploring franchising as a way to grow amid lower rents at many prime locations and as Southern California's economy shows signs of improvement.

August 09, 2010|Cyndia Zwahlen

The Leelin brothers, Mendrick and Michael, are betting they can turn their sleek new Japanese shabu-shabu restaurant in downtown Los Angeles into a national franchise — despite opening in the worst economy in decades.

With some signs of improvement in the Southern California economy, more and more small businesses are exploring franchising as a way to grow.

Working in their favor are lower rents at many prime locations and a supply of high-quality potential franchisees — individuals who have lost their corporate jobs but have savings to invest.

In California, companies registering to offer franchises for the first time hit 278 in the first half of the year, according to the California Department of Corporations. If that pace continues for the rest of 2010, the total would represent a 4% increase over last year.

Nationwide, the overall number of existing individual franchised outlets is projected to grow 2% this year to around 900,000, according to an International Franchise Assn. forecast.

Even so, franchisors are anxious about the additional risk the uncertain economy adds. Many have slowed their growth and focused more on bolstering existing units, experts said.

Meanwhile, potential franchisees are having a hard time qualifying for business loans. A few major franchisors, including Edible Arrangements International Inc. and Marco's Pizza, offer in-house lending programs, but that is not a viable option for most small franchisors.

Despite the challenges, small-business owner Bill Pettijohn, 31, of San Diego is rolling the dice on franchising, too.

He transplanted his Ohio power-wash cleaning business to Southern California after the 2007 wildfires and attracted several customers-turned-investors. He's sunk $250,000 into a custom-equipped truck that enables work crews to simultaneously power wash the exterior of a customer's home, clean the carpets, spiff up tile grout and blow out the air ducts.

The recession spurred him to expand his business concept beyond power-washing alone to boost sales. Now he's gearing up to be able to sell Aqua Pro franchises to others.

Mendrick Leelin, 26, recently set up Yojie Franchising to franchise the Yojie Japanese Fondue & Sake Bar concept. He and his brother, Michael, 28, are majority owners of the two shabu-shabu restaurants, one in downtown L.A. and their original location in Artesia.

By September they expect to have the legal documents they need to sell franchises. Franchising could enable them to take their shabu-shabu restaurants nationwide without spending their own money to open each location.

Shabu-shabu, which means "swish-swish" in Japanese, is a version of hot pot cooking — swishing sliced vegetables, meats and seafood in boiling water to cook.

The third-generation restaurateurs hopes to work with their banks to arrange financing for franchisees. For now, they are refining and standardizing the restaurant systems and operations, with the help of a consulting company.

They decided they needed more menu items, for example, but didn't want to add new ingredients. So their executive chef and mother, Yojie Leelin, came up with seafood carpaccio — razor thin slices of the raw Atlantic salmon and tuna they serve in chunks in the entrees.

Setting up a franchise system can mean scrambling up a steep learning curve for a small business, experts said.

But the chance to expand at today's relatively lows costs "may not be there when the market has healed itself," said Patrick Callaway, president of Francorp Inc., an Olympia Fields, Il., consulting firm.

Small businesses may be uncertain, he said, but those "that can get past this issue stand to gain the most."

smallbiz@latimes.com

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