What Will Franchising Look Like After the Recession?
A franchise resurgence is on its way ... will you be ready?
In franchising, most companies know how to prepare for seasonality, employee turnover and economic downturns. But no franchise systems have had to face the breadth and depth of the economic impacts of our current and uncertain times.
The good news? Franchise sales will rebound eventually, and given an extended, months-long lead-to-sale timeframe, franchisors can start preparing their organizations and ramping up their lead generation efforts right now.
Three core factors will primarily contribute to this resurgence, and they're the same factors that drive franchise sales, in general, no matter the state of the economy: people, capital and resources.
The unemployment rate is expected to average close to 14 percent for the second quarter of 2020, and it may reach 16 percent for the third quarter before beginning to decrease slightly beginning in Q4. Even many of those who have not lost their jobs yet are underemployed or looking over one shoulder to see if they will be the next to go.
One of the reasons franchise sales have traditionally fared well during a down economy is that unemployment or underemployment often spurs people to take the leap into becoming their own boss. As we have seen in past recessions, when businesses restart, there may not be an immediate return to the same number of employment opportunities — especially at the high end of the market.
Many of the people whose jobs have been affected, reduced or eliminated will have the hard and soft skills typically associated with franchise success (business experience, technology skills, leadership style and a willingness to follow systems). If they are not able to return to their previous positions, or are leery of returning to the corporate world, these people are naturally going to be looking for viable alternatives to provide for their families and futures. Franchise ownership may be a natural fit for many of these displaced professionals.
Franchise ownership is, of course, not the answer for all people who find themselves unemployed. Most likely, franchising will be attractive to those who have a nest egg, a severance package or other financial resources they can tap to purchase a franchise.
The upcoming months should provide greater access to lending for these future franchisees. Low-cost capital is available now in conjunction with government programs to support small business growth. The growing list of incentives from the SBA will help encourage small business growth, just as it did during the recession a decade ago. Franchisor sales personnel (in-house, brokers or franchise sales outsourcing) need to be knowledgeable about the funding options available in order to facilitate the sale and avoid hiccups in securing financing.
Unfortunately, some businesses will fail in the current climate. The commercial real estate market was already seeing vacancies, and the impacts of prolonged shutdowns will likely result in even more prime locations becoming available. It can, therefore, be expected that landlords will be willing to negotiate and offer favorable deals for prime locations. New franchise owners or current ones looking to expand as the economy re-opens will be able to capitalize on these favorable terms for their brick and mortar locations.
The same can be said for other vendors and suppliers to the franchise industry who have taken a severe hit during the crisis. Savvy entrepreneurs will see this as an ideal time to start a new business, leveraging the special post-shutdown concessions, pricing and terms that suppliers are no doubt going to be offering. And perhaps most importantly, there will be increased availability of labor for the franchise location due to hourly and other employees who are looking for work, answering the employment shortage that many businesses felt pre-COVID.
Despite the anticipated resurgence in franchise sales, one word of caution to franchisors: There will eventually be pent-up demand on all sides to get business back to a “new normal.”
For some businesses, this new normal may impact the underlying business economics of the model itself. And for those businesses, the difficult-but-wise choice will be to remain on the sidelines while adapting to the new world order. For those businesses that continue to prosper, it will be more important than ever to maintain the integrity of the franchise candidate evaluation and sales processes in the face of increased demand. It will be critical not only to ensure buyers are well-capitalized but that they are a good fit for the franchise brand and system in terms of experience, skills, philosophy and expansion goals.
Franchise sales are likely to surge in the years to come. When they do, the vital role that franchising plays in the economy will become more evident than ever before. Businesses looking to launch or continue their franchise programs would be well-advised to use this time wisely and prepare expansion strategies, make operational adjustments and shore up marketing tools and messages in anticipation of the resurgence.
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