Recession, layoffs fuel many to start small businesses

Inside a freshly renovated building, 27 restaurant trainees scurry around sweeping, shaping dough and cutting 12-inch practice pizza crusts into eight slightly misshapen slices.

"Keep your elbow up" and "Turn your wrist ⅛-inch at the end" are among the slicing tips practicing pizza cutters hear from scrutinizing store managers.

It's 9 a.m. on a Friday in August. The recession that started in December 2007 plods along as businesses continually fold, jobless claims tick up and millions of families desperately try to make mortgage payments and curtail spending.

Yet in this eastern San Diego strip mall, hopes abound.

Here, in three days, the first CiCi's Pizza buffet in California will open. The chain is known for cheap prices, peppy workers and a variety of pizza toppings.

For CiCi's Enterprises and its nearly 650 other restaurants in 32 states, this is an entree into a potentially lucrative market at a time when many of CiCi's expansion plans had to be scuttled because of the economic crisis.

For franchise owners Melissa and Andre Carter, it's a new beginning.

When the restaurant opened to a long line of CiCi's lovers on Aug. 10, the Carters' venture became one of nearly 30 million U.S. small businesses.

In this recession, starting a business from scratch or buying a franchise has been the way out for many. Of job seekers who gained employment in the second quarter of 2009, nearly one in 10 — 8.7% — did so by launching their own businesses, according to outplacement firm Challenger Gray & Christmas' quarterly Job Market Index. That start-up pace is up from 6.4% in the first quarter and is twice the rate reported in Challenger's 2008 second-quarter update.

The business owners nearly all believe they have enough energy and ambition to succeed — but statistics for success aren't on their side. Even in non-recessionary periods, about half will fail in their first five years, according to the Small Business Administration's Office of Advocacy.

From laid off to start-up

Many have become entrepreneurs by force. With 6.9 million jobs lost since December 2007, and work difficult to find, laid-off employees have created consulting firms, launched eBay businesses and signed on with direct-sales firms such as Avon to earn money.

"These are people that two years ago did not aspire to own a business, but circumstances have dictated that they look at freelance opportunities" and other business ventures, says Ken Yancey, CEO of non-profit entrepreneur mentoring group Score.

Not everyone, of course.

Austin-based Tom Nall, 66, had a retirement party from his job as a chili marketer on a Friday, took Saturday and Sunday off and was back working Monday on a new liquor business.

Nall was asked to be a consultant on the early stages of the launch of a tequila company. But instead of just advising, he thought the concept of an all-organic liquor was so enticing that he became a partner and the point person for raising capital. Now CEO, he says he has invested more than $100,000 in the Republic Tequila venture and has raised money from about 25 other investors.

"I think entrepreneurs are going to play a big part into bringing the United States back to economic stability," Nall says.

Small businesses employ a little more than half of all private-sector workers, pay 44% of total U.S. private payroll and have generated 64% of net new jobs over the past 15 years, according to the SBA's Office of Advocacy.

It's difficult to pinpoint any definitive long-term trends about small businesses leading the country out of recessions, but statistics show that for firms with no paid employees — "non-employer" firms — their creation rate goes up in a downturn, says Brian Headd, an Office of Advocacy economist. Using IRS data as a guide, the number of non-employer firms jumped 8.1% from 2007 to 2008, says Headd. When the economy was doing well in the late 1990s, non-employers had annual increases of about 2% to 3%.

About 75% of small businesses are non-employer firms. The rest are employer businesses — those with paid employees.

Employer firms typically decline or remain flat during tough times. Yet a study from entrepreneur-focused group Ewing Marion Kauffman Foundation shows that business creation in general ticked upward last year.

In 2008, an average of 320 out of 100,000 adults created a business each month — representing about 530,000 new businesses a month. That's a slight increase from 2007.

High start-up costs

The Carters — she's 36, and he's 42 — spent years kicking around the CiCi's Pizza idea. They had taken their kids to the chain when they lived in Texas and liked the pairing of affordable prices and friendly atmosphere.

They looked into opening a CiCi's in Texas but couldn't get a desirable location. After the Carters moved to San Diego a couple of years ago, they attended a CiCi's franchise expo in February 2008 and got the rights to open the first buffet in California. (CiCi's has a carry-out-only restaurant in Gardena, Calif.)

Being first in came with a big price tag. To open a buffet franchise, an initial investment typically ranges from $448,510 to $712,860, according to Coppell, Texas-based CiCi's Enterprises. CiCi's to-go franchises cost less.

The Carters put down $30,000 for a franchise fee, then shelled out tens of thousands more on expenses such as equipment, ingredients and hiring and training workers. They will owe the corporation a 4% royalty on sales and at least $2,300 a month for an advertising fund.

The couple's initial financing — through now-troubled lender CIT — fell through. But after some legwork, they secured a loan with a private lender.

They were lucky. Others have had a much more difficult time getting funding during the recession.

Dennis and Lisa Morton also were approved by CiCi's to open a franchise, theirs in the Chicago area. They also lost CIT funding but can't secure another loan.

"At this point, we are out $60,000" because of franchising costs, training expenses and legal fees, Lisa says. They've gone to 56 banks but are still without a lender.

They signed on with CiCi's in April and had a year to open a restaurant. CiCi's extended that timeline, but Lisa is still worried.

"We pretty much took everything that we had for the down payment," she says. "At that time, the bottom hadn't dropped out (of the stock market) yet."

As the Morton family struggles to cut spending — as well as find financing — the whole family, which includes two teens, is feeling the pinch.

"There were just so many high hopes in this house," Lisa says. Now, "There's been a lot of crying."

It's not just new franchise owners reeling over tight credit markets and tight-fisted consumers.

Across the country, about 200,000 franchise-related jobs have been lost, and more than 15,000 retail units have closed, according to International Franchise Association CEO Matthew Shay.

CiCi's has had its troubles as well. In addition to significantly scaling back on its expansion plans because of the credit crunch, it also had 39 store closures in 2008. The company says the percentage of systemwide stores that closed remains near its historical annual average of 6%, but because it had more stores in the system in 2008, the actual number of closures was up from the previous year. It blames the recession, as well as factors such as poor store location and management, for those closings.

The company did manage to bring in higher revenue despite the recession, at $580 million, a 1.8% rise over 2007. Yet, that increase was smaller than the 5.4% revenue rise from 2006 to 2007, even though there were more stores in the system in 2008.

'A little bit of variety'

Around 7 a.m. on Aug. 7, Melissa Carter is driving to the first full day of employee training. By 7:45 a.m., she is catching up with her recently hired store managers. A few hours later, she is showing workers the CiCi's way of doing things: how to stock the salad bar (very neatly) and how to greet customers (very loudly, with a cheer of "Hi, welcome to CiCi's!")

Her bright red shirt and quiet authority make her stand out from her hired managers and the men in staid blue button-downs that came from CiCi's corporate office to help with the launch.

She is the leader, but a mere two years ago, her restaurant knowledge was at the same level as most of these trainees: barely there.

Carter has a law degree from South Texas College of Law and worked in the legal field in Texas and California. But that career wasn't for her long term. "I'm not really cut out for working in an office, being in one place all day every day," she says. "I need a little bit of variety."

She has a diverse day now, serving customers, making shift schedules, determining inventory and working on budgets.

Like Carter, many potential franchisees come from other industries, says CiCi's Enterprises President Craig Moore, who is retiring this year. Often those folks don't realize that while they're pursing their entrepreneurship dream, customers simply see them as a pizza provider. "In the restaurant industry, you're a servant," Moore says. "You're no better than a servant."

As for Carter, she is a servant to thousands of people each week. Opening week alone, she had about 6,000 patrons.

She works up to 70 hours a week. Leading up to the grand opening, her workday was longer, often 15 hours. At one point during the opening, she joked that she needed three days straight of sleep to make up for all the slumber she has missed.

Those long hours will likely continue, as they do for most small-business owners.

Slightly more than 60% of them say they toil six or seven days a week, while only 22% of the general population say they work that much, according to Discover Financial Services' Discover Small Business Watch May survey of entrepreneurs who have fewer than five employees.

Carter has reaped some early rewards for her work. Opening week, she pulled in about $30,000 in revenue, Moore says. While the CiCi's system average is nearly $1 million a year, early signs show that the San Diego CiCi's could take in more. Moore says it could take in $1.5 million in annual revenue.

But the actual take-home profits can vary greatly. Robert Rinaldi, who owns a CiCi's franchise in Niles, Ill., says he has brought in "decent numbers" after his Aug. 31 grand opening. Yet sky-high expenses — such as $10,000 monthly rent — gnaw at the bottom line.

Rinaldi, who also had difficulty obtaining financing, says he's relieved to finally get the restaurant open. But he adds that his stress level is high.

"Now it's going to be constantly monitoring the labor and sales (levels) to keep it going," he says. "If I stick it out, I think it can be a successful store. I just don't know if I have the working capital to keep it afloat."

Millions of other small businesses are buckling under economic pressures.

More than 60% of small businesses polled by the National Small Business Association in late June and early July reported revenue declines over the past 12 months. That's the first time a majority of small-business respondents cited decreases since NSBA began asking the question in 1993.

Two in three also cited profit decreases. Only 18% of firms said profits were increasing.

In 2008, there were 43,546 business bankruptcies, according to the Administrative Office of the U.S. Courts. That was up from 28,322 in 2007. For the first half of 2009, 30,333 businesses have already filed for bankruptcy.

Those figures don't count personal bankruptcy filings that some small-business owners claim instead of a business bankruptcy.

1,000 served

On opening day, the CiCi's workers certainly delivered a friendly and festive atmosphere. Some of the female workers tied balloons to their ponytails, and throughout the day, workers cheerily greeted lines of customers with enthusiasm.

At 8:24 p.m., the restaurant remained filled. "It's been crazy," says Carter, who at various points in the day couldn't remember the combination to the store safe or the location of her car keys.

By the 10 p.m. closing, about 1,000 people had been served.

After the last customer walked out, Carter's husband, Andre, sits with two buddies in a back booth. He works in ground operations for Southwest Airlines but has committed much time to the CiCi's launch as well.

"I hope I'm not working for a non-profit," he quipped earlier that day, as he surveyed the restaurant.

He seems satisfied but exhausted.

It's been "positively overwhelming," he says. "I've literally had about four hours sleep for the third day now. … It takes every little ounce of energy to muster up and go forward, but that's what we call perseverance."

In front of the restaurant, Melissa Carter is sweeping the floor.

Later that night, the duo joke that they might as well sleep on the air hockey table in the restaurant's game room because they have to be back again early the next day to do it all over again.

"It's been a long day, we're tired and achy," Melissa says.

Nearly three weeks later, she sounds energized again. She's taken a rare afternoon off to get some errands done.

On her agenda: business calls.

"I just got off the phone," she says. "I'm negotiating a lease on a second (CiCi's) now."