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Do franchises really benefit from an economic downturn?

Sarah Stowe

As the economy falls and unemployment rates rise, many people look to invest in their own franchise. However, while there may be an influx of enquiries by potential franchisees, are they prevented from opening up shop by the bigger hurdles of an unstable market?

During the recession of the early 1990s franchisors experienced a rapid rise in enquiries. Many people invested their redundancy package into a solid business deal in the hope of gaining job security by owning their own franchise. The same boost is now expected during 2009 as a knock-on affect of the current ailing economy and job losses.

“Franchising typically picks up when the economy heads down south because corporate downsizing frees up plenty of middle and upper management employees who seize the opportunity to go into business themselves,” said Kevin Bugeja, managing director of Franchise Selection.

Bugeja continued, “We are finding lots of prospective franchisees are considering buying a franchise because they believe that their job may be on the line if things get tougher. They are looking to secure their future and income going forward.”

However, people can be hesitant investing in a business during such slow times. According to Andy Simpkin, managing director of mobile coffee franchise Cafe2U, “In a downturn the biggest fear the potential franchisee faces is that they won’t be able to make their business work.”

To overcome this common concern, CafŽ 2U offers a ‘warming’ system on all new franchises, building the business up to generate $500 a day before handing over the territory to the new franchisee. “In uncertain times, people really value certainty,” said Simpkin.

Simpkin feels confident, that no matter how hard the times, people will always need a caffeine fix, giving need for the mobile coffee service. Bugeja also believes that the food and drinks sector will see a steady increase in investing franchisees due to a guaranteed custom. “The most franchise enquiries at present are in the hospitality industry, as people are aware that everyone will continue to service this category. Casual dining or fast food restaurants will become more popular as people down-trade from more expensive dine-out options.”

As well as needing the guarantee of regular trade, new franchisees also need capital. Although many use their ‘golden handshake’ package from former employers, this sometimes isn’t enough, and trying to get a loan during a downturn can be difficult.

Snap-on Tools is one franchise company that has recognised the change in the financial market and now offers an easy entry scheme, with new franchisees now only needing half the normal start-up capital. “Banks are less keen to lend money now, so we’re offering to provide about half their upfront capital,” said managing director Ajit Ponnambalan.

Franchisees repay the interest-free loan over four of five years, 50 per cent of sales going into a savings account. As a result of this scheme, Snap-on Tools has just opened a further three franchises. “We know we don’t have a business if our franchisees are not successful. We are not prepared to stand still, so we are leveraging our balance sheet,” said Ponnambalan.

So it seems that while certain franchises will see an increased interest, the franchisors need to adapt to the economy to guarantee the opening of a new franchise in such challenging times and continue their estimated growth as a brand.