Franchising a good option for start-ups

From the print edition

More and more people are looking to start up a company. With unemployment and underemployment at persistent high levels for middle classes in both developed and emerging economies, many people with a little money to invest are looking at self-employment as an alternative to those hard-to-find jobs. 

But how does a would-be-entrepreneur with limited experience in running a business maximize his or her chances of success? And once a small business gets established and wants to expand, how does an owner who doesn’t want to take on debt get capital for expansion? 

Franchising can be a very useful tool for addressing both of these dilemmas.

The term franchising brings to mind giant chains like McDonald’s and Starbucks, or well-known rent-a-car and hotel brand names. But the concept can be applied to many well-organized small businesses. 

Franchising involves expanding a replicable business by packaging and selling the name and know-how to entrepreneurs who buy or rent franchise licenses and put up expansion capital unit by unit. Today’s dominant franchise chains often grew their businesses from humble beginnings.

In Costa Rica, there is much institutional support for small and medium-sized start-ups, often referred to by the Spanish acronym PYMES, for which state banks have special lines of credit. But soft loans alone will not a successful start-up make. 

The Costa Rican Chamber of Commerce has looked into this matter in depth and sees franchising as promising enough to establish a special franchising promotion unit. On July 11, Karol Fallas, director of the chamber’s franchising project, presented interesting findings to the press at the chamber’s Barrio Tournón headquarters in northern San José.

Statistics from the United States on franchising as a business model that greatly increases the chances of success are compelling: While only 23 percent of non-franchise, small-business start-ups survive 10 years in that country, fully 92 percent of franchise businesses last at least a decade. 

In Costa Rica, franchising started in 1970 with McDonald’s. The first significant native Costa Rican franchise was Musmanni bakeries, which started licensing expansion in 1985 and then went international. Now, the chamber identifies 221 franchise brands in Costa Rica, of which 183 (83 percent) are international and 38 (28 percent) are native (TT, May 19, 4).

Franchising here is taking off. Since 2000, growth of franchise businesses in the country has consistently outpaced gross domestic product growth. The business model even thrived during a crisis in the 2009 economic year, growing 13 percent while the economy shrank 1 percent. 

At present, the Costa Rican Chamber of Commerce is helping 12 small businesses to organize as franchises for expansion. A big part of success of local-company franchising is affordability for the franchise purchaser: 67 percent of Costa Rican franchise licenses cost less than $50,000, and only 7 percent cost more than $100,000. Restaurants and food services dominate Costa Rican franchising, with 50 percent of the market. The rest is a mixed bag, with activities as varied as mechanic shops, air conditioning, veterinary stores and education.

On Aug. 30-31, the chamber will host a franchising fair at the Ramada Plaza Herradura Hotel, northwest of the capital. More than 60 franchises are already booked. For more information, see:  www.camara-comercio.com.