Slow Economy = Swift Franchise Purchases
Q: I understand that historically during slower economic times, people purchase franchises. Is this true, and why would someone want to start a franchise when the economy is slow?
A: An interesting phenomenon of a general downturn in the economy has often been the growth in franchise systems that occur while the rest of the economy is going south. Driven by the fear of losing their jobs or the uncertainty of what the economy will do to their company and therefore their chances for advancement, people begin to seek ways to get control of their destiny. For many individuals, franchising may be their ticket to personal independence and the end of the fear of ever being laid off again.
Franchising usually comes with the benefit of proven systems and brand names, and therefore there is a perception that it can reduce the risks associated with starting a new business. Individuals purchasing franchises have been a staple of franchising's growth since the end of WWII.
Two other franchisee constituents have emerged and been strengthened since the last sustained downturn of the '80s and early '90s: multiunit operators and investor groups. Multiunit ownership has been the major growth vehicle for many franchise systems during the past 10 or 15 years.
Based on their satisfaction with the performance of their franchise investments, individuals have simply purchased more and more locations. Most times they purchased franchises from the same franchisor to leverage their knowledge of the business and the strength of the franchisor's brand in their markets. However, today many multiunit franchisees are buying franchises from several franchisors. The reason for doing so may be that there are no longer any additional locations in their markets that meet their requirements. While they want to continue to expand, they don't necessarily want to expand into other markets, or they may simply want a new challenge or opportunity.
Investors have also begun come to understand franchising during the past few decades. When passive investments in the stock markets are strong and return on investment is secure and strong, money flows into the capital markets-stock ownership. However, as the market becomes soft, as companies begin to lay off staff, entrench and declare bankruptcy, investors turn to the stability and higher returns possible from franchised locations.
Those investor groups, instead of purchasing one location at a time, purchase entire markets and agree to develop a minimum number of locations over an agreed period of time. They leverage the weakening labor market that exists during the downturn and take advantage of lower rents as the real estate markets soften.
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Is it a good idea to turn to franchising as the economy softens? Yes and no. There are some spectacular opportunities in franchising today. The ROI that some franchisees are able to earn was strong before the downturn and has even improved in some industries. Look to those industries that are not only recession-resistant, but can also take advantage of the trends and opportunities created by the changing economy. These may not be available in every industry segment that is franchised, but you can find opportunities that fit every investor's pocketbook.
But simply buying a franchise is not a guarantee of success. It's a mixed market. For example, franchisees of some of the larger, more established franchise systems are seeing the value of their investments whither as their businesses have become less and less profitable, while franchisees of other systems in the same industry are doing just fine. Some concepts and management are better able to weather difficult times than others. The difference in a down economy is that consumers set great store in companies that can deliver quality and value and are able to meet their continuing need better than companies that historically drive sales one promotion at a time.
At the same time, the development of new franchise systems and opportunities is booming. Brand-name companies that may never have franchised before are offering some of the opportunities. Some are being offered by brand-new start-up franchisors that were not even in business a year ago. These new concepts often can take advantage of trends better than more established companies that have to retool an entire system to make the change.
A word of caution: Don't get caught up in the hype of buying a franchise. Franchise salespeople are the kings of spin, and brochures and Web sites always paint a rosy picture. They will always talk about the strength of their concept, the fact that it is recession-proof and why it will only get stronger. But you must spend the time to investigate both the opportunity itself and the industries expected to thrive. Look at companies that have benefited from the softening market, and see if you can determine why they are so strong. Even if they are not offering franchises, you may be able to locate some of their competitors that do. The Internet is a wonderful source of information-use it and don't rush.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the book Franchising for Dummies and a former member of the International Franchise Association's Board of Directors and Executive Committee.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.