Testimony of
Matthew R. Shay
President
International Franchise Association
May 25, 2005
Executive Summary
My name is Matthew Shay and I am the President of the International
Franchise Association (IFA). Established in 1960, the mission of the IFA
is to safeguard the business environment for franchising worldwide. IFA
is the oldest and largest franchising trade group representing over
1,000 franchisor, 8,000 franchisee and 400 supplier members. The
nation’s more than 760,000 franchised businesses generate jobs for more
than 18 million Americans (nearly 14 percent of the nation’s
private-sector employment) and account for $1.53 trillion in economic
activity (9.5 percent of the private-sector economic output).
One of the wonderful features of franchising is its diversity. Over 75
industries franchise and franchise opportunities come in all shapes and
sizes. For an initial investment of under $32,000, one can launch a
residential cleaning franchise. That initial investment includes a
franchise fee of around $9,000 with the rest being equipment purchases,
lease costs, and so forth.
The IFA is not a newcomer to the idea that veterans and franchising can
make a great team. Through IFA’s Veterans Transition Franchise
Initiative, known as “VetFran,” 337 franchises have been sold to
veterans and another 137 deals are pending. IFA also offers an annual
veterans educational advancement scholarship.
IFA endorses the Veterans Self-Employment Act, which would allow more
veterans to take advantage of the opportunities in franchising by
allowing a veteran to apply a portion of his or her educational benefits
to defray the portion of a franchise purchase cost attributable to
training.
We understand that this legislation seeks to create a program that is
not burdensome, but rather one that allows the greatest number of
veterans to have access to the greatest number of franchise
opportunities and we applaud that aim. As the process moves forward, we
look forward to working with Congress, the Veterans Administration and
other agencies to ensure that this legislation make more franchise
opportunities available to veteran potential investors in an efficient,
effective way for all stakeholders.
Introduction
Chairman Boozman, Ranking Member Herseth, and other members of the
Subcommittee, thank you for the opportunity to testify before you on the
Veterans Self-Employment Act of 2005. I appreciate you holding this
hearing Mr. Chairman and thank you and your staff for your work on this
bill. And I would also like to thank Representative Baker and his staff
for their work and for listening to our concerns and the concerns of
veterans while producing this legislation. It is an innovative way to
help veterans enter the world of franchising – to be, as we say, in
business for yourself, but not by yourself.
My name is Matthew Shay and I am the President of the International
Franchise Association (IFA). Established in 1960, the mission of the IFA
is to safeguard the business environment for franchising worldwide. IFA
is the oldest and largest franchising trade group representing over
1,000 franchisor, 8,000 franchisee and 400 supplier members.
The Impact of Franchising
Last year, the International Franchise Association Educational
Foundation released the results of an unprecedented study of the
economic impact of franchising on the economy. What we learned was eye
opening: Franchising is an enormous component of the U.S. economy.
This half-million dollar study conducted by PricewaterhouseCoopers found
that the nation’s more than 760,000 franchised businesses generate jobs
for more than 18 million Americans (nearly 14 percent of the nation’s
private-sector employment) and account for $1.53 trillion in economic
activity (9.5 percent of the private-sector economic output).
In the counties that make up the 3rd Congressional District of Arkansas,
Mr. Chairman, there are over 2,200 franchised establishments generating
jobs for over 37,000 workers. And in the South Dakota, Ms. Herseth,
there are nearly 2,500 franchised establishments providing jobs for over
54,000.
The Contribution of 767,483 Franchised Businesses to the US Economy
Indirect and Direct
Because of Franchised Businesses
(indirect) Percent of the Private Sector Economy
(indirect) In Franchised Businesses
(direct) Percent of the Private Sector Economy
(direct)
Jobs 18,121,595 13.7% 9,797,117 7.4%
Payroll $506.6 billion 11.1% 229.1 billion 5.0%
Output $1.53 trillion 9.5% 624.6 billion 3.9%
Direct Employment by Economic Sector
Information 3,629,000
Construction 6,826,000
Financial Activities 7,807,000
Franchised Businesses 9,797,000
Durable Goods Manufacturing 10,335,000
Impact of Franchising in the Counties of the Congressional Districts
of Subcommittee Members
Member of Congress Congressional District Franchised Establishments Jobs
Rep. John Boozman AR-3 2,235 37,401
Rep. Stephanie Herseth SD-AL 2,500 54,000
Rep. Richard Baker LA-6 2,323 39,976
Rep. Ginny Brown-Waite FL-5 4,026 43,789
Rep. Lane Evans IL-17 3,975 63,590
Rep. Darlene Hooley OR-5 4,717 80,081
Note on the data: All data are from 2001, the most recent year
available.
Clearly, franchising is a critical engine of economic growth. Over 75
industries utilize the franchise model for distribution of products and
services: everything from the familiar restaurants and hotels to lawn
care, tax preparation, personnel services, movers; the list goes on.
Even in economic downturns, franchising creates jobs. There are
countless stories of people downsized from their companies who have
chosen franchising as a way of becoming their own boss and controlling
their own destiny.
About Franchising
The terms “franchising” and “franchise” are often used interchangeably
to mean a business, a type of business, or an industry. Strictly
speaking, the “franchise” is the agreement or license between two
parties which gives a person or group of people (the franchisee) the
rights to market a product or service using the trademark and operating
methods of another business (the franchisor). The franchisee has the
obligation to pay the franchisor certain fees and royalties in exchange
for these rights. In this sense, franchising is not a business or an
industry, but it is a way of doing businesses.
There are two main types of franchises – product distribution franchises
and business format franchises.
Product distribution franchises sell the franchisor’s products and are
supplier-dealer relationships. In general, the franchisor licenses the
use of its trademark to the franchisee but may not in all cases provide
the franchisee with a system for running its business. Examples of
product distribution franchises are soft drink distributors, automobile
dealerships, and gas stations.
Business format franchises not only sell the franchisor’s product or
service, with the franchisor’s trademark, but operate the business
according to a system provided by the franchisor. Among other things,
the franchisor also provides training, marketing materials, and an
operations manual to the franchisee. There are many examples of business
format franchises, including – quick service restaurants, automotive
services, lodging, real estate agents, convenience stores, and tax
preparation services, to name a few. The International Franchise
Association represents business format franchising across this entire
spectrum.
The typical franchise company (franchisor) will have establishments that
are operated by franchisees as well as establishments that are operated
by corporate employees. Over three quarters of franchised establishments
are owned by franchisees. The remainder are owned by the franchisor.
One of the wonderful features of franchising is its diversity. As I
mentioned earlier, over 75 industries franchise – everything from
plumbers to realtors, florists to hoteliers. Likewise, franchisees come
from all walks of life.
Franchise opportunities come in all shapes and sizes. For an initial
investment of under $32,000, one can launch a residential cleaning
franchise. That initial investment includes a franchise fee of around
$9,000 with the rest being equipment purchases, lease costs, and so
forth.
To open a quick service restaurant, the investment would be in the
$300,000 – $2,8000,000 range depending on whether the location was a
mall food court facility or a freestanding facility complete with a
playground and would include a franchise fee of $45,000 to $50,000. To
start a major, full service hotel, though, might require an investment
of over $70,000,000. The franchise fee in this range would be about
$85,000.
The training provided by franchisors is as diverse as the lines of
business themselves, but can include material such as sales, costing and
pricing, customer service, inventory control, regulatory obligations,
quality standards, daily operational management, business computer
systems. The training also likely will include education on specialized
knowledge of the goods, services, policies, and practices of the
individual franchise system.
Veterans and Franchising
The IFA is not a newcomer to the idea that veterans and franchising can
make a great team. In 1991, during the Gulf War, the IFA – under the
leadership of board member Don Dwyer – launched the Veterans Transition
Franchise Initiative, known as “VetFran.” Through VetFran, the
participating franchise companies pledge to help qualified veterans
acquire franchise businesses by providing financial incentives not
otherwise available to other franchise investors. Veterans will get the
"best deal" from these companies.
Through a Memorandum of Understanding with the U.S. Department of
Veterans Affairs, with the cooperation the Veterans Corporation and the
U.S. Small Business Administration, and with outreach initiatives to our
country's military and veteran organizations, the program continues to
expand.
When IFA testified last June on the Veterans Self-Employment Act,
approximately 100 franchises had been sold through the VetFran program
and 75 more agreements were in the pipeline. I am proud to say that a
recent survey of our membership revealed that today 337 franchises have
been sold through VetFran and another 137 deals are pending.
The number of participating IFA member franchise systems is growing as
well. Last year, 139 companies were part of VetFran and today there are
162 participating companies.
Successful franchise agreements have been realized through companies
such as Express Personnel Services, Geeks on Call, Glass Doctor, Kabloom
Franchising Corp., Meineke Car Care Centers, Merry Maids, Mr. Rooter
Plumbing, PostNet Postal & Business Services, and the UPS Store, just to
name a few.
In a further effort to assist veterans, the IFA Educational Foundation
and Michael H. Seid and Associates, LLC, last year established an annual
veterans educational advancement scholarship. The program is designed to
help veterans transitioning out of the military to achieve their dreams.
The 2005 award winner is Marine Corps veteran Johnny Fajardo. Fajardo
served in Iraq as a Communications Specialist. After completing his tour
of duty, he returned to his family of four in Tucson, AZ, to a full-time
job as a cable technician during the day, and to part-time studies at
the Pima Community College. Fajardo is continuing his studies at the
University of Phoenix, working toward completion of a bachelor's degree
in business.
Fajardo plans to become an entrepreneur, to start his own business, and
he says that he "is exploring all options, including franchising."
Fajardo's parents both dropped out of school to come to the U.S. in
search of a better life. Fajardo says, "I realize that if my parents had
had a formal education they would have been very successful in their
endeavors. I want to complete my education and build a better legacy for
my children."
The 2004 recipient was Marine Corps Captain Nathaniel Fick, who is
enrolled in a joint MBA program at Harvard University.
The Veterans Self-Employment Act of 2005
The Veterans Self-Employment Act would allow more veterans to take
advantage of the opportunities in franchising by allowing a veteran to
apply a portion of his or her educational benefits to defray the portion
of a franchise purchase cost attributable to training.
We understand that this legislation seeks to create a program that is
not burdensome, but rather one that allows the greatest number of
veterans to have access to the greatest number of franchise
opportunities and we applaud that aim. As the process moves forward, we
look forward to working with Congress, the Veterans Administration and
other agencies to ensure that this legislation makes more franchise
opportunities available to veteran potential investors in an efficient,
effective way for all stakeholders.
As with any new proposal, we have some questions and concerns about how
the program might function that we would like to note and to work with
the Subcommittee and others to address.
As I mentioned earlier, franchising is an astonishingly diverse world,
with training curriculum that is tailored to each particular concept.
Therefore, due to the scope and diversity of the franchising sector – 75
industries – it would not be possible to create a standard franchise
training program. For this reason, we urge that the new program be
flexible enough to recognize the legitimate variations that exist in
franchise training. We also hope that Congress will make clear its
intent that this program is not intended to create a de facto standard
for training requirements. While franchisors should be encouraged to
participate in this program, that participation should be entirely
voluntary.
Many franchise systems conduct centralized or regional training, which
may require that prospective franchisees travel to the training location
and be housed in hotels. We ask that such expenses be included in the
training costs that the program would reimburse.
Another concern is that the program not create an entitlement to a
franchise where none exists. We believe that Congress should be clear in
its intent that veterans participating in the program must be otherwise
qualified to purchase a franchise according to the participating
franchisor’s requirements and standards.
We realize that the legislation leaves to the Secretary of Veterans
Affairs discretion whether to approve franchisor applications to the
program or to delegate such approval to the states. We appreciate that
the bill also suggests that the Secretary consult with franchise
representatives and we pledge to assist the Secretary in any way we can.
We strongly urge that Congress make its intent clear that these
evaluation processes be sufficient to protect veterans and taxpayers
while also being clear, simple and efficient enough to attract
participation by the greatest number of franchise systems.
To give one example, if the Secretary retains authority to approve
training programs, we urge that the process be similar to achieving
Small Business Administration approval: that a franchisor can be placed
on a VA registry so that approval is not required with respect to each
franchisee’s individual application. Similarly, should the Secretary
choose to delegate evaluation of franchisor training programs to the
state approving agencies, a franchisor should be able to satisfy the
requirements of one state in order to allow participation by veterans of
all other states.
We also would seek an approval process that would ensure that a
franchisor’s trade secrets and other proprietary information would not
become part of the public record.
Another concern raised is the possibility of this program opening the
door to federal regulation of franchising, which IFA believes is not
only unnecessary, but which IFA believes would be unduly burdensome on
an important segment of the private economy. Again, we understand this
is not the intent, but Congress should clarify that point.
In conclusion, I would again like to thank you, Mr. Chairman for holding
this hearing thank you Representative Baker for writing this bill.
America’s veterans deserve every opportunity to achieve the dream of
business ownership and we believe that franchising will be the right
choice for many of them.
Thank you and I would be happy to answer any questions.
Matthew Shay
President
International Franchise Association
Matthew Shay is President of the International Franchise Association.
Since joining IFA in 1993, he has also served as Executive Vice
President and Chief Operating Officer, Senior Vice President and Chief
Counsel, as well as Vice President and Director of Government Relations.
Shay has represented IFA at legislative and regulatory proceedings at
the federal and state levels, appeared on television and radio programs
on behalf of IFA and been quoted in such publications as the Wall Street
Journal, Washington Post, Nation’s Restaurant News, New York Times and
Restaurant Business, among others.
Shay is responsible for IFA’s management, including finance and
operations, membership development and marketing, communications, and
legislative, regulatory and legal initiatives. He works closely with
IFA’s Board of Directors and leadership on strategic and policy issues
affecting IFA and on other matters related to governance and structure
of the association.
From 1988 until he joined the IFA staff, Shay served as Assistant
General Counsel of the Ohio Council of Retail Merchants in Columbus,
Ohio. He is a graduate of the Ohio State University College of Law in
Columbus, Ohio, where he was a member of the Ohio State Law Review, and
received his undergraduate degree at the Wittenberg University. Shay is
also a graduate of the U.S. Chamber of Commerce’s Institute for
Organization Management and holds the designation of Certified
Association Executive (CAE), which is conferred by the American Society
of Association Executives.
IFA, headquartered in Washington, D.C., is the world’s oldest and
largest association representing the interests of franchising, with more
than 1,000 franchisor members, 8,000 franchisee members and 400
franchise supplier members. The membership of IFA includes franchise
systems operating in more than 75 different industries including, among
others, the leading franchise systems in the quick service restaurant,
hospitality, real estate and automotive industries.
For more information, please contact the IFA Media and Communications
Department at (202) 628-8000 or visit IFA’s website at www.franchise.org.
|