Is franchising really recession proof?

23/06/2018 14:00 | Start a business

Is franchising really recession proof

Many franchises advertise themselves as recession-proof. Particularly in the current economic climate, this is what attracts a large number of investors. Businesspeople want to start their own company but are often concerned that the economic conditions are not conducive to the opening of new businesses. Thats 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 recessions. Here, we take a look at whether franchising is really recession proof, or whether it struggles through periods of economic difficulties, too.

Economic concerns

The modern economy is neither particularly stable nor supportive of new business ventures. 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 still 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 also ensured that business-orientated individuals are 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 theyre far more secure than independent business ventures. This can be attributed to a variety of factors;

  • Proven business model successful franchises thrive because theyre 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 and 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.

Confidence in big-name franchises

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, theyre perceived to be far more low 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 wont be turned down by lenders when trying to set up their franchise.

Franchise success rates

Franchise success rates point towards them being far more stable and better performing than other types of business. Though figures do vary, most sources site franchises as having a 90% success rate. Considering that economic conditions have not been particularly favourable over the last decade, its astounding that the franchise success rate has remained so high. Such a figure does suggest that franchises are better at surviving recessions than independent business but does not indicate that the model is recession proof.

Franchises can still fail

Franchises can and do still suffer during recessions. It doesnt matter what industry youre working in or how essential the service or product you supply is, all businesses struggle when people's willingness and ability to spend decreases. To think of franchises as recession proof is not correct. Though they're healthy and far more stable than traditional businesses, they're still part of the broader economic system, and still suffer when that system crashes. However, by limiting their exposure to risk and error, franchises can be accurately described as recession resistant.

Start-up costs

One of the most significant factors that prevent franchises from being entirely recession-proof is hidden start-up costs. While a large number of franchises advertise their business with a minimum investment cost,' it can be difficult to find information on the total franchise investment required to get a business up and running. Though the vast majority of franchisees will do their research and understand exactly how much working capital it will take to get their franchise unit operational, wait out an initial loss-making period, and begin to expand the business, others dont realise that the minimum investment cost is just a fraction of the total cost of setting up a franchise.

To find a genuinely recession-resistant franchise, franchisees need to request accurate financial information from their franchisor and talk to existing franchisees. Once a precise figure has been given, franchisees are in a much better position to make an informed decision about whether the franchise is financially viable. In many cases, it's a lack of information and the consequent exposure to more significant levels of risk that makes franchises vulnerable to economic downturns.

Conclusion

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. 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 a lower risk by many major lenders. Over the last decade, their ability to prosper during economic downswings has been proven, and their reputation as a relatively safe investment is well earned.

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