Today we provide an overview of the franchising industry and how it’s been set up to fare well during tough economic times like a global recession.
Many franchises advertise themselves as recession-proof and, in the current economic climate, this is what piques the interest of many investors. Entrepreneurs are eager to start their own business but are often concerned that the economic conditions are not conducive to the opening of new businesses. That’s where franchising comes in.
Backed by large, experienced franchising management teams and able to rely on credit from major lenders, franchises are sturdy, stable, low-risk businesses that don't suffer as much during global recessions. Here, we take a look at whether franchising is really recession-proof, or whether it struggles through periods of economic crisis.
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The franchising industry
Before we get started, let’s explore the current state of the franchising industry based on findings from the 2018 BFA/NatWest Franchise Survey.
There are around 48,600 franchise units in the UK that contribute over £17.2 billion and 710,000 jobs to our economy. The industry is continually growing, with this figure increasing by £2.1 billion from three years ago. It’s also been found that six in 10 franchise units turn over more than £250,000 and 93 percent of franchises claimed profitability in 2018.
Franchising is also increasing in popularity with the younger entrepreneur, as 18 percent of franchisees are now under 30. And 37 percent of new franchisees are women, which is a 20 percent increase since 2015.
Starting a business during economic uncertainty
Since the 2007 recession, large national economies have struggled to recover, leaving many business owners with concerns about future downturns and economic instability. Banks and major lenders are often insecure about lending to new businesses, and the squeeze on credit has prevented many entrepreneurs from launching new business ventures.
This lack of confidence in the economic system has resulted in business-oriented individuals looking for safer ways to make their money. One such way is franchising. Having long been touted as recession-proof, more and more businesspeople are looking to become a franchisee as a means of pursuing their dream of running their own company, securing finance for business ventures and gaining valuable experience.
Are franchises recession-proof?
In reality, no business model is recession-proof. Recessions affect every aspect of the economic system and, consequently, touch on every part of modern life. However, franchising could be described as recession resistant. While franchises may still suffer in a recession – though some may prosper too – they’re far more secure than independent business ventures. This can be attributed to a variety of factors…
How has franchising historically weathered the storm of global recessions?
- Proven business model – Successful franchises thrive because they’re able to take a proven business model and apply it in a variety of different contexts. Whereas independent businesses are continually experimenting with their model to try to optimise profits, franchises utilise an unchanging, proven model. This reduces the scope for error and maximises the chance of turning a profit.
- Expertise and experience – Franchisees benefit from the experience and knowledge of their franchisor and aren't isolated from good support and guidance. This contrasts with independent business owners, who are often on their own and find it difficult to get help.
- Better access to financing – Although recent economic downturns have made funding new business ventures increasingly tricky, franchising benefits from strong support from major lenders. This means that it's easier to fund a franchise in difficult economic conditions and that greater working capital is available if it is required.
Franchising has historically done well under most economic conditions…During boom periods, the fear of missing out on a great opportunity fuels strong franchise growth. During a downturn, on the other hand, the fear of job loss and financial security drives many people to take control of their own futures by investing in a franchise business. – Eric Stites, CEO of Franchise Business Review
- Established brand - One of the critical factors that make franchising recession resistant is the confidence lenders seem to have in big-name franchises. Compared to independent businesses, they’re perceived to be lower risk and a relatively safe investment. Organisations like the British Franchising Association (BFA), alongside individual franchises, have also worked hard to foster strong working relationships with lenders. This means that franchisees can raise investment far more easily than independent businesses and can be more confident that they won’t be turned down by lenders when trying to set up their franchise.
- High success rate – Franchise success rates suggest they are far more stable and better performing than other types of businesses. Though figures do vary, most sources site franchises as having a 90 percent success rate. Considering that economic conditions have not been particularly favourable over the last decade, it’s astounding that the franchise success rate has remained so high. Such a figure does suggest that franchises are better at surviving recessions than independent businesses, but does not indicate that the model is ‘recession-proof’.
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Working through a global recession
When we talk about franchises being ‘recession-proof', we're not entirely accurate. No business is altogether recession-proof, and a significant economic crash will damage enterprises of all types.
However, it would be correct to talk of franchises as being recession resistant. Compared to independent business ventures, franchises are far more secure during severe economic downturns and tend to be more able to weather the storm of global recessions.
In large part, this is because they have the backing of large, experienced organisations, stick to a proven business model and are perceived to be lower risk by many major lenders. Over the last decade, their ability to prosper during economic crises has been proven, and their reputation as a relatively safe investment is well earned.
Check out our top 10 recession-proof business sectors.
Becky Martin, Point Franchise ©