The U.S. franchising industry is poised for modest growth in 2011, according to two new studies to be released this week.

Franchise businesses in most sectors are expected to add more store units and employees this year, concludes an analysis produced by consulting firm PricewaterhouseCoopers on behalf of the International Franchise Association, a trade group in Washington. PWC attributes the positive outlook in large part to the recently enacted tax and unemployment benefits package, which includes payroll and income tax cuts.

The study projects that the number of franchise units will grow 2.5% in 2011 to 784,802. Last year, franchise units increased just 0.3%, and their ranks declined 3.6% in 2009.

Franchises are also expected to create 194,000 new jobs in 2011, a 2.5% increase that will bring total employment to an estimated 7.8 million. Franchises expanded their payrolls 0.6% in 2010 after shedding 2.8% of their employees in 2009.

Economic output—the gross value of the goods and services a business produces—is projected to grow 4.7%, or $33.3 billion, for franchise businesses, reaching an estimated $739.9 billion in 2011, PWC said. Last year, economic output rose 3.4%, following a 0.3% increase in 2009.

By sector, all business lines except business services are projected to increase in store volume and employment this year. The largest gains in these areas are expected in lodging, automotive and retail products/services. In terms of economic output, industries expected to see the greatest increases are automotive, commercial and residential services, personal services and retail food.

Business is starting to improve for Driven Brands Inc. and its six franchise brands, which include Maaco and Meineke, said Ken Walker, chairman and chief executive of the Charlotte, N.C., auto-repair company. Following a relatively flat 2009, Driven Brands’s revenue increased 3.1% last year, and Mr. Walker anticipates a 5% increase in 2011 sales. “We’re going to see a good period,” he said. “I am very confident.”

Meanwhile, a recent survey of 142 franchisees by the franchise association also suggests that 2011 will be a better year for their businesses. Nearly three-quarters of respondents said they expect “moderate to significant” increases in same-store sales over the next 12 months, while 40% said they expect to see an improvement in business conditions. Forty-five percent said they expect to increase employment “moderately to significantly.”

To be sure, survey respondents also noted that obtaining sufficient funding remains a major hurdle to success. Thirty percent said lack of credit has had a “significant impact on ability to expand business,” and 25% reported it has had a “moderate impact.” In addition, 42% of franchisees said they’ve seen “no improvement” in access to credit in recent months, while 28% reported a “moderate improvement.” Just 18% said that a lack of credit had “no impact” on their business and that they were able to obtain financing, while 27% said their business did not require any financing.

“Without more consistent access to credit, franchisees can’t grow,” said Steve Caldeira, president and CEO of the association. “We’re beginning to see some light at the end of the tunnel, but clearly again we have a long way to go.”

These days, only about 40% of BrightStar Care franchisees rely on bank loans to get started, add more units or make renovations, whereas three years ago just about all of them tapped home-equity loans for such purposes, said Shelly Sun, chief executive officer. Today, 40% of the home health-care company’s 195 franchisees nationwide are also funded by owners’ retirement savings, and 20% operate with cash investments, she said.

BrightStar Care earned $100 million in system-wide sales last year, up from $52 million in 2009. The company projects sales of $175 million in 2011, plus the opening of 86 more locations. Its corporate staff increased to 53 people last year and “because of the [extension of] the Bush tax cuts, we plan to add 15 additional personnel in 2011,” Ms. Sun said. She further attributes the company’s expansion to a growing preference among seniors for home-based health care rather than relocation to a nursing home or assisted-living facility.

To help prospective franchisees get started, some franchisors have begun offering in-house financing options in recent years. Nadiene Raia said she launched a Money Mailer franchise last September by borrowing roughly $30,000 of the $40,000 total cost from the direct-mail advertiser. The loan includes the option to defer interest-free payments for the first two years.

Ms. Raia had previously been laid off from a publisher position at an alternative weekly newspaper in Sarasota, Fla., and she said she didn’t bother to seek out a bank loan because she lacked a track record of owning a business. “For somebody that’s looking to get involved in franchising and doesn’t have the capital, this is the way to go,” she said of the option she chose.

Article by Sarah E Needleman at the Wall Street Journal.  01/12/11