Matthew Shay is president and chief executive officer of the International Franchise Association, the nation’s largest association representing the $2.5 trillion franchise industry, which consists of more than 900,000 franchised businesses.
Headquartered in Washington, D.C., the IFA represents more than 1,300 franchise systems and 10,000 franchisees operating in 75 different industries such as foodservice, hospitality, lodging, real estate, automotive and business and consumer services.
Since joining IFA in 1993, he has held several staff positions including executive vice president & COO, senior vice president & chief counsel and vice president of government relations. Prior to joining IFA, Shay served as assistant general counsel at the Ohio Council of Retail Merchants in Columbus, Ohio.
Shay took time for a phone interview last week on the state of franchising in 2009.
QUESTION: In January, you forecast a year of cautious optimism in the face of economic challenge. You predicted a loss of 10,000 franchise businesses this year, more than 200,000 jobs and a loss of $4.2 billion in economic output - all attributed to the ongoing credit crisis. Ten months later, would you revise any of that forecast?
SHAY: The biggest issue continues to be the availability of credit. In spite of the rescue package for financial institutions in extremis and a large stimulus bill, the flow of credit to small business has essentially ceased. A number of banks have either left the market completely or stopped lending to small business.
Many sources of credit have become virtually nonexistent. Without credit for people to get started in business and then to operate a business in the short term before it becomes profitable, that makes things very difficult.
I have been encouraged in the past few weeks by statements from the president, the Treasury and the Small Business Administration. We finally are getting some traction. They are making the things we support a priority. They finally are realizing that access to credit for small businesses equals job creation. In October of last year we were saying this is not an equity crisis but a credit crisis, and they finally agree with that. The unemployment rate is so high, people are finally saying 'What do we do?!' The answer is to restore the flow of credit to small business.
In January, we predicted that access to credit would be down by 25% this year. We recently updated that assessment. We now think access to credit is down closer to 40% this year. It's become worse. We are leaving tens of thousands of jobs on the table.
QUESTION: Has the downturn of employment in the corporate world been a boon to small business ownership?
SHAY: No question. It has created a windfall of highly qualified individuals to become engaged in small business, on the ownership side and the employee side. In many cases, people laid off from the corporate world make ideal candidates as franchisees, or allow smart franchisees to pick up highly qualified talent.
QUESTION: Have the market gyrations over the past year produced a "franchise skittishness," especially among those aged 45-55, typically a sweet spot for franchise businesses? Are people shying away from operating franchises?
SHAY: No. I think that as those people see volatile equity markets and the way those markets operate, they think they need to find new alternatives to protect their assets and their livelihoods. They are taking their assets out of equity and real estate markets, which they cannot control, and putting the money to work in an active investment where you have significant control over overall value. With franchising, you can create an asset you can sell or transfer, that has appreciated in value while providing yourself a secure livelihood.
Franchising offers an opportunity to secure your financial destiny - if you have access to enough credit to launch a business. Depending on the scale of your investment, there are a wide range of opportunities.
QUESTION: Are you seeing more people using their severance payouts as a means to start up a franchise?
SHAY: Yes, that's generally been a key source of money to get a business off the ground in this environment. In 2002 or 2003, people were able to access the equity in their homes or their 401(k)s. Now they use severance or other liquid savings.
QUESTION: In January, the IFA forecast SBA lending down by as much as 50%, from $20 billion last year to $10 billion. Has that played out?
SHAY: Overall, SBA lending has been up, thanks to stimulus activity, an increase in funding and a relaxing of some requirements. But our sense is that not enough of that lending went to new business start-ups or franchises. You have to understand where the loan guarantees went, you have to dig through the numbers a bit. Refinancing real estate is not much of a stimulus to the economy, not beneficial to many people. An increase in absolute loan volume doesn't necessarily translate into great benefit to the economy.
QUESTION: Are you seeing more franchisees default in this economy?
SHAY: No question. In challenging times, the stronger operators survive, and for the weaker ones it creates greater hurdles.
Especially in a credit-crisis environment, franchisors recognize that they are not going to be able to grow their systems by developing new units. Instead they are devoting their time to promoting the economy for existing franchisees. That is a key attribute of the franchise business - the resources the franchisor brings to the franchisee, who then can focus on his individual unit without worrying about promotion or marketing. Franchise relationships become more important than ever in these times, the franchisor and franchisee have to work together more.
QUESTION: The IFA has taken policy positions on a number of pending legislative issues. For instance, you've come out against the so-called Employee Free Choice Act.
SHAY: We see it as a job killer, not a job creator. If we start mandating union organization, we take away the right of the employee to determine by themselves through use of a secret ballot. When you have an organized work force, there are higher labor costs. In the franchise business, you tend to have significant employee turnover, younger employees who go from job to job. We do not believe this is the right time to take away peoples' right to a secret ballot in a union drive.
QUESTION: You've come out against cap-and-trade legislation.
SHAY: We come at this issue as consumers, we're not as directly engaged in it as large corporations. In general, we don't want to see additional burdens and regulations. We do think it's prudent to take steps in a cost-effective way to be sensitive to environmental concerns, but there has to be the right balance for burdens placed on business. First, we have to get the economy working again. New taxes and regulations will kill the economy right now.
QUESTION: Health care reform?
SHAY: There is no question that we need health care reform and insurance reform, but we don't want to see it done on the backs of small businessmen.
Our primary concerns are over an employer mandate and a government-run plan. The mandate is the key issue - taxing employers, imposing a payroll tax. Franchise owners employ a lot of part-time workers, transient employees. Do you want more jobs created or greater benefits for existing employees. The money has to come from somewhere and is likely to come in the form of a tradeoff - cut existing employees or cut other benefits or not hire new employees. There's a flaw in the logic that suggests you can continue to pile burdens on business. There's a point at which you can't accept any more in taxes and regulations that push companies over the edge.