3 Things You Should Know About Small Business: September 17

NEW YORK ( TheStreet) -- What's happening in small business today?

1. Restaurants continue to shift towards franchise model. More restaurant chains are seeking to franchise stores as the credit markets open, signing new franchise agreements for brand new locations or acquiring preexisting locations to expand their unit counts, according to Technomic.

"Restaurant companies are shifting towards a franchise growth model by selling company-owned stores to raise money and reduce capital expenditures, focusing more on the brand and less on operations," said Technomic EVP Darren Tristano. "The fast-casual and quick-service segments in particular are seeing higher levels of appeal based on lower costs of entry and strong unit economic models."

The top 400 restaurant franchise companies generated an estimated $34 billion in sales in 2011 and accounted for almost 10% of the total commercial restaurant industry sales of $370 billion, according to Technomic's 2012 Top 400 Restaurant Franchise Company Report.

Eighty-seven percent of McDonald's sales came from franchised stores for a total of $29.7 billion in 2011, whereas Subway's system is 100% franchised, meaning that all $11.4 billion was generated by franchisees, the report says. The next largest chain in terms of total U.S. franchise sales was Burger King at $7.4 billion.

Many chains are taking advantage of national brand strength and resources while reducing their own start-up and operating costs. Plus, with recent closures, more prime locations are available for new restaurants, Technomic says.

2. The SBA and the International Franchise Association are at odds over franchise survival rates. The Small Business Administration said in its monthly newsletter that survival among independent businesses compared to franchises "appears to be similar" as cited by Blue MauMau, a website for news and information related to franchise ownership.

Founder Don Sniegowski writes this is not the first time that the SBA has made this statement, yet it goes against popular sentiment and has largely "failed to catch the attention of sellers and buyers."

According to the SBA, half of all new establishments survive five years or more, while one-third survive 10 years or more.

But the International Franchise Association dismisses the unflattering franchise success rates, claiming that many of the franchises are "misclassified" by the SBA.

"Not all franchise businesses are coded as such and the SBA data does not compare business segments in the franchise sectors to the same segments in the non-franchise sectors," an IFA spokeswoman told Blue MauMau.

Sniegowski says there are two different comparisons going on here -- the SBA is referring to U.S. Census research while the IFA is referring to the SBA's report on the repayment of SBA-backed loans by franchises.

The IFA prefers to use its own data, including the fact that over 90% of franchisee owners renew their contracts with franchisors.

Bob Purvin, chairman and founder of the American Association of Franchisees and Dealers, argues that the IFA statistics are also misrepresented. "The renewal rate claim is yet another example because it implies that 90% of franchise buyers are successful, meaning that they are profitable and happy," he says.

Still it's a number that many franchisors use in their marketing materials to attract would-be franchisees, regardless of whether it's providing a comprehensive picture of the business experience.

3. Con marketing fools no one. What can a small business learn from Nokia's ( NOK) marketing mistake? Plenty.

Last week, the tech company got caught red-handed when it was discovered that some of the promotional videos and photos it used to hype its new Lumia 920 PureView smartphone weren't legitimate.

It's an embarrassment that is bad for a corporation and arguably even worse for a small business, particularly if it's a major public relations disasters AND self-inflicted as Nokia's was.

Information Week shares lessons that small businesses can learn from Nokia's error.

"Con marketing is a fast path to SMB ruin," Techaisle CEO Anurag Agrawal told Information Week. "SMBs, especially very small businesses, reply upon word-of-mouth and referrals to grow their business. They have to be extra careful to make sure that they deliver what they promise."

The first rule of thumb is that if you think no one will notice any falsified measures used to promote a product or services, think again, and the news media as well as the far reaching abilities of social media used by customers won't let you forget it.

Is the risk associated worth the reward? Many times it is not, particularly in terms of the financial measures that might be needed to get your business out of the hole.

Communication is also key. Make sure any major customer-facing decisions are well-communicated and well-vetted within the company, the article says.

While pre-launch buzz can be a good thing don't promise what you can't deliver.

Finally, making a mistake is one thing, but not being prepared to react and respond is likely to scratch your second chance with the public. Have a plan ready to go in worst-case scenarios.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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