Shipping giants, quick and full-service automotive, and national childcare businesses.
These are just a few of the industries that comprise more than 800,000 franchises in the United States.
According to a 2021 U.S. Census report franchise operations make up approximately 11 percent of American businesses – and continue to grow. The International Franchise Associates reports that franchises will number 821,589 business in 2024.
The Business of Franchise
Inflation is a headwind, and labor continues to be a challenge.
As small-businesses owners, franchise operators face many of the same headwinds of all small-business owners, including hiring challenges, inflation, supply chain constraints, interest rate risk and, of course, geopolitical discourse and a looming domestic election.
“Inflation is a headwind, and labor continues to be a challenge,” said Patrick Ellis, who covers Regions Franchise Banking in the East. “It is across the board in different industry sets so really having a broad impact.”
“There are two stories here,” shared Peter Salas, head of Franchise Banking at Regions. “There is the national franchise economic outlook, which is influenced by macroeconomics, and then there are geographical pressures, including labor costs that in many cases end up hurting the very people they are trying to help. In addition, food prices have been skyrocketing.”
Over the past few years, the franchise industry has been navigating a proposed new joint employer law that would have essentially made franchise owners employees of the corporate brands rather than business owners.
“This law would have changed the franchise model completely,” noted Salas. “The franchise owner and employees working for the corporate brand would have essentially wiped out all of the equity and all of the wealth these small-business owners generated.”
Part of the second story Salas referenced is that franchise owners, much like most businesses, are impacted by microeconomic challenges such as tough local hiring markets. From pressure for higher wages to an increased competitive landscape, businesses continue to struggle to attract, hire and retain qualified employees. Through parent company initiatives many franchise owners have additional resources such as educational scholarships, health insurance and a 401(k) program that may help attract and retain employees.
A new franchise owner in this highly competitive industry we spoke with shared that hiring and retaining staff has been a notable challenge in an industry that has been short-staffed since the pandemic rocked the worlds of working parents.
“This is a challenge in all businesses, but especially in childcare, when consistency in the classroom experience is paramount to success,” this owner of a top-rated childcare franchise in Texas noted. “It is important for the teachers to form relationships with the students, and this is not possible if teachers are changing out due to staffing issues.”
Franchising: The Childcare Challenge Solution?
Houston-based Janean Germany covers Regions’ franchise banking efforts in the West and has noticed a growing trend towards childcare facilities.
“In Texas there is a lot of new construction in the childcare sector,” Germany noted. “With large population increases in the state, we could use two-thirds more daycares than currently exist, so there is a lot of opportunity.”
Germany also shared that across the footprint and brands she and the team are hearing a lot of sticker shock from franchisees as the cost of equipment and construction has increased significantly in recent years.
“A lot of new franchisees are looking to enter the systems, and Franchise Disclosure Documents (FDD) are only updated annually so the latest FDD will look much different than the prior year,” said Germany. “This is limiting many opportunities as some franchisees that just don’t have the means struggle to get into the system due to cost constraints. I don’t know if we’ll see a slowdown here.”
With large population increases in the state, we could use two-thirds more daycares than currently exist, so there is a lot of opportunity.
The costs associated with starting a childcare center five years ago was around $5 million total project cost, according to Ellis. He noted that that cost can now reach upwards of $8 million.
“It is an annuity type business, and we see franchisees focused on continuing to build upon their brand,” Ellis said. “Cost is shrinking the franchise model, and we are seeing more multi-unit operators and fewer single-unit operators. Overall, the operations and operators are becoming more sophisticated.”
This demand for childcare centers is high across the U.S. as working parents struggle to balance the needs of working families and quality care. And with new childcare center franchises being built or renovated there are additional positive impacts to these communities. Each new childcare facility can employ upwards of 30 people and can serve as wealth creation vehicles for franchise owners.
The Regions Franchise Banking team is very experienced in working with the top-rated brands of childcare center franchisees.
“We have seen demand for lending and banking products for clients in this sector triple year over year,” noted Ellis, who shared that the majority of the current projects are located in Texas, Georgia and Florida in markets that have seen a lot of growth in recent years. The team is also seeing a lot of growth opportunities in this industry in North Carolina and Tennessee.
The new Texas childcare franchise owner we spoke with pointed out the importance of quality childcare facilities.
“Without childcare the U.S. economy cannot function,” they noted. “It is paramount to the workforce that we are comfortable that our children are being cared for while we are working.”
