Yes, You Can Buy a Franchise In a Bad Economy — But First, Ask These 5 Questions
A step-by-step guide on what to find out before you sign.
We all have big questions about the economy. Are we heading into a recession? Are we already in one? How high can interest rates go? Will inflation cool anytime soon? How long will "help wanted" signs linger? Where is the stock market's bottom?
But in the franchise world, people are often asking this: Is now still a good time to buy a franchise?
Industry experts say yes — but your approach should be different than in boom times.
First, let's consider the emotional reality: "We have more people interested in owning and operating franchises, because they just don't have the same belief system in the old-fashioned, stable job," says franchise executive coach Rick Grossmann, coauthor of Franchise Bible. The pandemic caused many people to rethink what they expect from work; they began to see long-term jobs as precarious, single streams of income.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
As a result, many went into business for themselves. In the past year alone, some 83% of people surveyed said the pandemic accelerated their plans to start their own businesses. According to the U.S. Census Bureau, even after the wave of business creation in 2020 and 2021, corporate registrations are still above pre-pandemic levels.
Everyone seems to want more flexibility, resiliency, and control — and that's exactly what attracts many people to franchising. Plus, Grossmann says, a strong economy that started a few years before COVID hit — and a strong real estate market — have created a very qualified group of franchise buyers. "People have a lot of equity in their homes, and there are still people with money in the bank and good credit," he says. "It's a perfect storm for franchise ownership."
But that's not to say it's a gold rush, with people grabbing any opportunity they can. Quite the opposite: Industry insiders say they're seeing increasing selectiveness among prospective franchisees.
"The number of brands that franchisees are considering right now has been reduced," says Joe Malmuth, chief franchising officer at Batteries Plus. "They used to look at three or four; now they're looking at one or two. And it's not the same mix they used to consider. They're very focused on fast food, but only with drive-thru. It's home services, but it has to be essential services. Franchise candidates are looking for stable things."
In other words, people are not just looking for any opportunity — they're looking for the right opportunity for right now.
So, how can you figure that out for yourself? Start by asking these five key questions — each of which will help you identify a brand's strength and stability, and help anticipate what might come next.
Question 1: How resilient is the brand, and for how long?
But now they're drilling deeper, Malmuth says. Some will also ask how the brand did during the Great Recession from 2007 to 2009, and some even investigate as far back as the dot-com bust.
They're also asking different questions depending on their age — because the age of a potential franchisee has started to radically shift.
These days, Malmuth says, about half of franchise buyers are millennials, meaning many of them were still schoolkids when the dot-com bubble burst in the early 2000s. "They saw what the last recession did to Gen X and Baby Boomers," he says, "and now they're in a position to make that decision themselves."
That means they're approaching with caution, but also optimism. They want to ensure as much stability as possible, because they like to think of franchise ownership as a job you can't get fired from, Malmuth says. For this reason, he says, he also talks to them about franchise ownership as a way to add new streams of income to their lives — because they might be able to work a day job and have a franchise on the side, or eventually buy multiple franchises. "It's the same mentality as having a diversified portfolio," he says.
Meanwhile, older franchisees are thinking about a different kind of resilience. They often see franchises as a more resilient form of a retirement plan: As they near retirement age, they feel more comfortable with their money inside of a business than having it in the stock market.
"There's a lot of franchise opportunities that you can get into with a couple hundred thousand dollars from your 401(k)," says Jason Anderson, president of the flexible-workspace franchise Office Evolution. "People are now looking to do something else with that 401(k), and they see an opportunity to make a higher return."
Older franchisees are also thinking about resale value. They want to know if, when they retire and sell their franchise, they'll be able to get good value for it. "We want to help them maximize their return on investment," Anderson says, "even if it means selling their location."
Anderson believes that franchisees will be in a good spot to do that. "A franchise operation can sell for a little more than a mom-and-pop business," he says. "If you buy Jim's Burgers and Jim is no longer there, people wonder, Where's Jim? Customers may not want to be there anymore if they don't like the new guy. With a franchise, that's not always an issue because there's a system in place. The brand has a value that's independent of the owner."
Question 2: Is this business essential?
The term essential business took on a whole new meaning during the pandemic, as it became the dividing line between which businesses could operate during lockdowns and which couldn't. Today, potential franchisees are using the phrase in a different way: They want to know which brands are essential to people's lives — and which products or services customers will stick with, no matter what.
That type of thinking is driving interest at many different brands, including Floyd's 99 Barbershop. "Most people can't cut their own hair," says Joe Zemla, the company's senior director of franchising. "People have to get their hair cut."
When potential franchisees ask how the company did during past economic downturns, Zemla and his team are happy to share the numbers. The Great Recession drove some of Floyd's strongest years, and the brand's franchise shops had their highest number of new shop openings in 2021. "It was a 20% growth rate in 2021," he says. "And also, several of our existing franchise partners signed new development agreements during COVID. That shows us that they have confidence in us as a brand, especially at such a challenging time."
What else is "essential" these days? It's varied. Luke Schulte, executive director of franchise development at Handyman Connection, says his business model is essential because handymen work on small-but-important renovations that homeowners and business owners continue to need during down times.
"Those small-to-medium-sized projects will always be there, regardless of what's happening with the price of supplies and bigger projects," he says.
Brands will also point to certain elements of their services as a way of identifying what will keep customers coming back in hard times. That's what Joe Hummel does as the CEO of lodge-themed restaurant Twin Peaks. Because his restaurants also function as sports bars, he says, they can feel like an essential part of consumers' lives — even if those consumers start cutting back on dining out overall.
"Sports are never going away," he says. "We own the sports market. When you look at our brand being married with sports, people see us as a safe harbor."
Question 3: Is the brand adapting to a changing economy?
People have had to get creative these past few years. They're changing careers, rethinking their lives, and adjusting their spending habits. Now they're asking if brands can do the same.
Doug Bostick, president of quick-service Italian restaurant brand Fazoli's, has ready answers. Among them, he says, the brand has gotten creative about solving its labor shortages. One solution: Fazoli's started prompting consumers to add a tip to their bill, despite tipping not historically being the norm in fast-casual spaces.
"That helps inflate the average hourly wage," Bostick says, which in turn builds employee loyalty and drives down turnover. The average worker can see almost an extra $1 per hour because of the change. "It was one of those things where, two or three years ago, I just didn't want to do it," Bostick says. "To me, it's a negative for our guests, for the consumer. But I tested it, and the guests seemed to want to participate in it, so we rolled it out. We have it in about 75% of our franchise locations now."
Fazoli's has also found ways to lower franchisees' startup costs — in part by helping them build out locations in existing, repurposed restaurants. "We have been converting Steak 'n Shakes, Pizza Huts — something that already has a drive-thru on it," he says. "Everybody wants a brand-new building, but in today's world, a second-gen build cuts off almost two-thirds of your cost."
Hummel has found similar savings when helping franchisees select locations for Twin Peaks.
"You get probably a 30% reduction in build-out costs with a second-generation rebuild," he says. "We've converted so many types of buildings. Our brand — our ambience — lends itself to a lot of different structures. We need street presence and parking. We can make the rest of it work."
Malmuth, of Batteries Plus, says that new franchisees also like seeing brands adapt to new ways of marketing. They want brands that can reach consumers wherever they are.
"The one thing the pandemic did was change where you market and how you market," he says. "We've seen an uptick in advertising when you log into something like Netflix and Hulu, and they play an ad right at the top. We've shifted advertising to that because that's where the eyes are."
Question 4: Is the franchise compatible with a day job?
There was a wave of new franchisees during the pandemic. Now comes the second wave — it's those new franchisees' friends, who watched what happened and were inspired to follow along. But these people are not always ready to swap their day job for a franchise. Instead, brand leaders say, they're often hearing from prospective franchisees who want to do both.
For that reason, more franchise brands are now promoting the idea that people can buy in without giving up an existing career. Handyman Connection, for instance, started offering a manager-led business model in the past year.
"Before, we wanted somebody who was going to come in and work the business 40 hours a week," Schulte says. "You were the general manager who did all the hiring and customer management. Now, we have a model for our franchisees that hires a manager to do the heavy lifting, and you manage the manager. You need more capital to do that, but you get time back. Maybe you put 20 hours a week into the business instead of 40 hours a week. That way, you don't necessarily have to quit your job."
What's driving the shift? Leaders trace it back to another shift in work: As hybrid and remote work seem here to stay, workers are thinking more creatively. "Time off and time on has gotten fuzzier," he says. "You can take a call from your manager pretty much anytime, instead of having to sneak out at lunchtime from an office."
Jason Stowe, vice president of franchise development at Cyberbacker, says he's seeing a lot of real estate agents and business coaches show interest in his brand for similar reasons. Cyberbacker provides virtual assistants at an affordable price point. While a real estate agent might have to pay about $45,000 for a full-time administrative assistant, he says, Cyberbacker can provide the same level of assistance for $1,300 to $1,800 a month — a sales pitch that one real estate agent can give to others during downtime.
"They can continue doing what they do," Stowe says, "but now they have an opportunity to create wealth in a different form, utilizing the network they already have."
Of course, there are also franchises whose entire business model is premised on flexible work. That includes Office Evolution, which provides flexible workspaces and is increasingly serving people who can work from home, but still really want to get out of the house.
"We've seen a surge in coworking demand," says Anderson, Office Evolution's president. "We're seeing corporations move their people out of traditional office space and into flexible office space. We have law firms that will rent our conference rooms for a week to handle depositions. We have international language teachers who come in to work in the middle of the night because of the time zone differences."
Even sectors like insurance, which have always had a downtown presence, are now turning to this model, he says. "If you drive down Main Street, there's some random office where an agent pays for that office, and nobody ever comes into that office," he says. "You're seeing those kinds of major brands move to flexible spaces. It simply makes more sense."
Question 5: Can consumers still afford you?
If there really is a major economic crash, consumers will change their spending habits. They'll buy less and become more price-sensitive. Potential franchisees should be anticipating this, which is why they need to be asking: What do these products or services cost, and will people continue to be able to pay for them?
At Floyd's 99 Barbershop, that question is baked into the brand's sales pitch. "Not many clients will trade down and go to the value-type hair cutters, but we will see them trade down from a high-end salon to Floyd's," Zemla says. "And once they give us a shot, a high percentage stay with us. That's what we saw in 2008 and 2009 too. It helps our brand flourish."
Similarly, Hummel says the average per-person check at a Twin Peaks restaurant is $21, an amount that most people can still muster when times get tough — especially if they feel like they're getting good value for that money.
"People don't feel like they're dining down," he says. "You can get a hand-cut New York steak or a cheeseburger and feel like you had a really great experience on both ends."
So, what next?
Nothing is guaranteed, of course. Even the most recession-proof business models can still stumble. That's why any franchise expert will advise you to do a ton of research, including speaking with a lawyer and existing franchisees, to make an educated decision about which brand to buy into, particularly with big, looming questions about the economy.
These five questions are only the start — but they're a good start, because they investigate a brand from multiple angles. You want to know what the brand is doing to serve consumers during hard times, but also what's on the minds of those consumers. Because ultimately, in an economic downturn, success will rest upon this one question: How valuable is this brand in people's lives now?
"Stability is important, but the world has changed in terms of how people have shopped and how people consume," Malmuth says. "There is still trepidation in certain areas. Making sure you're getting into an essential industry is incredibly important."
Entrepreneur Editors' Picks
This Co-Founder Was Kicked Out of Retailers for Pitching a 'Taboo' Beauty Product. Now, Her Multi-Million-Dollar Company Sells It for More Than $20 an Ounce.
Have You Ever Obsessed Over 'What If'? According to Scientists, You Don't Actually Know What Would Have Fixed Everything.
After He Was Fired From the UFC, This Former Fighter Turned His Passion Into a Thriving Business
Most People Don't Know These 2 Things Are Resume Red Flags. A Career Expert Reveals How to Work Around Them.