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Buying a Franchise in Tough Times

Written by : Cheri Bell
2010-09-23
An economic downturn or recession creates job insecurity and causes unemployment to rise. The down-sizing of jobs adds to the overall uncertainty in the market place, disenfranchising some members of the workforce over the long-term or even permanently. Competition for scarce jobs becomes heightened. Lower pay scales unconnected to work experience become acceptable. Seniority, experience and age are often a detriment to reintegration into the job market. Transference and acquisition of job skills permitting the crossover into new industries and functions is not always obvious. Many people become disinclined to spend their lowered disposable income beyond necessities of life. Reduced spending translates into a slower recovery for the economy.

Buying a franchise may offer an interesting solution to job insecurity or loss. The question arises how a recessionary climate impacts the decision to purchase a franchise.

Purchasing a franchise is an extremely viable alternative in a recession. Franchises exist in just about every industry so a purchaser can find a business compatible with his or her interests. Franchised businesses are offered at many different investment levels, responding to the financial comfort-level of every purchaser. In cases of low-investment franchises, a bank loan may not even be required, thus reducing the risk and stress to a franchise newcomer all the more. Most franchises do not require prior experience in the field of endeavour. Franchisors offer adequate operational tools, training and support to permit a new franchisee to operate his or her franchised business with confidence. Many purchasers embrace the idea of being their own boss and building equity for themselves in an uncertain economy. Unlike a new entrepreneur that has to build a business from scratch, franchisees generally pay to become a member of a franchised network that has an established operating system and goodwill in the market place.

Statistics show that franchising is a much more viable than going it alone in business. Individual or non-franchised businesses have a much higher failure rate than that of franchised businesses. What should be considered, though, when buying a franchise in tough economic times?

Many of the considerations are the same whether the economy is strong or weak. For example, a prospective franchisee must always undertake research of the industry and of the particular franchise of interest. A prospective franchisee must ask a lot of questions of the franchise’s management team as well as of current and past franchisees. The list of questions is long but may include the following: How long has the franchisor been in business? How long has the franchisor been franchising? Does the franchisor have one or more corporate stores? What markets does the franchisor franchise in? What is the franchisor’s market share? Are the products and services offered by the franchised business at the top of consumer trends and demand curve?  Are they priced competitively in the market place? What is the nature of the competition? What are the franchisor’s 5-year development and marketing plans? Is there a marketing fund in place? What brand advertising has been, and is being, undertaken by the franchisor? What is the total initial investment required? Is bank financing required? Does the franchisor offer any financing assistance? If a brick-and-mortar location is required, does the franchisor provide location and build-out assistance? How many franchisees are currently in the system? How long is the franchise term? What are the renewal terms? Are current franchisees making a profit and how long did it take for them to turn a profit? How long does it take for franchisees to earn back their initial investment? Are current franchisees planning to renew their franchise agreement? How many franchisees have left the system in the past and why? Is prior industry experience required? Does the franchisor provide adequate training and support? Etc. The answers to all these questions will provide a prospect with the information needed upon which to base a franchise purchasing decision.

A poor economy could have an important influence on the choice of franchise, particularly for a purchaser with a low-risk profile. Some franchises offer a lower franchise fee, royalties and marketing commitment relative to other franchise concepts. Low or no bank financing may be needed for franchises that offer a low investment opportunity. When no or low bank financing is required, a franchisee will not have to mortgage his or her house, for example, or provide other loan guarantees. In a downturn economy, the degree of saturation in the market place will take on greater importance; as well the size of a franchisee’s protected territory. A risk-intolerant purchaser in a struggling economy may also prefer a home-based franchise to a brick-and-mortar retail-location franchise: a home business eliminates the costs of rent, design, build-out and fixturing. A home-business also provides the franchisee with beneficial tax savings and may reduce or eliminate the need to hire and pay for personnel. Another factor of importance is whether the franchise in question sells products or services. In some cases the startup and ongoing investment are lower in a services business because no costly products inventory (and attendant inventory management tasks) are required. In some cases, the business insurance associated with a services business may be lower. The term of the franchise agreement and its renewals are also crucial to the analysis of the franchisee’s return on investment and profit profile.

In conclusion, franchising is an excellent option in every economic state, with a higher success rate than launching an independent business on one’s own. Buying a franchise may be an excellent solution in tough economic times, in the face of job insecurity or loss. In all cases, prospective franchisees must do their research, however, before jumping in. An economic downturn may influence the choice of franchise, particularly for a risk-intolerant purchaser.

Cheri Bell is an experienced franchising, licensing, business-growth and commercial lawyer/advisor. She consults for franchisors, franchisees and businesses across Canada and internationally on all aspects of their business, from their growth model, to legal issues, contracts, operations, branding, marketing and sales.

Contact Cheri at (514) 488-8007 and cheribell@sympatico.ca.

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