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IS THIS A GOOD TIME TO BUY A FRANCHISE?

by Simon Lord,
last updated 10/08/2015

May 2009 - If you're thinking of buying a franchise, perhaps now is not the time. Doom and gloom is all around and the future is uncertain. Well, think that way if you like, but you could be missing out on a great opportunity.

 In 1991, when the British economy was severely depressed and getting worse, sales in franchised outlets rose by an average of 11 per cent. In 1991/92, when Australia was suffering business losses in the billions and redundancies were measured in hundreds of thousands, franchising grew by 25 per cent. In New Zealand in 1998, when business confidence was at a seven year low, franchisors were anticipating sales growth in existing outlets of around 20 per cent - a figure which many achieved. And in many franchises, their biggest problem recently has been a shortage of new franchisees to serve their growing customer base.

That's not to deny that there is a recession out there and many businesses are hurting. But despite that, if you choose wisely, this could indeed be a good time to buy a franchise. McDonald's knows that - that's why they've announced plans to build 30 new restaurants in the next three years. In fact, there are a number of areas where the unique characteristics of a franchise help businesses not only to survive in an economic downturn but actually to flourish.

Efficiency

The first losers in any economic downturn are inefficient companies which are carrying surplus staff, surplus stock, or are failing to control costs. Good franchise companies do not fall into this category. Having owner/operators in each outlet making the buying and staffing decisions on the spot keeps franchises ‘lean and mean' by nature.

In addition, the sharing of information which allows franchisees to benchmark target costs for each aspect of their operation encourages them to keep wastage low, making franchised outlets generally more efficient than the norm for the industries in which they operate. Long-standing franchisors have learned the lessons of previous slow-downs and are passing them on to their franchisees'

Buying Well

Buying the right stock at the right time for the right price is always important, but this is a time when the advantages of being part of a franchise come into their own. Suppliers know that supporting a group is particularly important, and will tend to offer better prices and service to franchise systems as a result.
However, if franchisees feel they are not getting the best deals they shop around locally and information gathered is shared across the franchise. The result is that franchise systems can effectively have committed buying agents throughout the country, and consequently can often be more cost-conscious - and buying-efficient - than many larger companies. It is obviously important not to let quality or consistency be damaged by such price-driven purchasing, but the advantages can be significant.

Clear Planning

Many smaller companies fail because of the lack of clear planning. Franchise systems benefit from a franchisor whose job it is to see the bigger picture and to create clear marketing plans based on an understanding of what customers want and what their competitors are doing. These plans will include product development, advertising, maximising profit margins and new business generation (read Coping with Recession ). Such vision is missing from most independent small businesses, and is often responsible for their collapse.

While many non-franchised businesses do have marketing plans, the unique advantage of franchising is that while the franchisor is seeking out opportunities and exploiting them on a national scale, individual franchisees are looking for similar advantages in their own territories. This is an example of the pro-active nature of franchising. Franchisees are quick to make suggestions or tell their franchisor if something isn't working, and are eager to make changes if it will result in better performance. That gives them a significant edge over managed organisations where change is often resisted.

Focus On Doing A Few Things Better

In difficult times, many companies succumb to the temptation to pick up every dollar they can by broadening their range of products or services. However, this can often lead to a lack of focus on their key market. Franchises, in contrast, traditionally specialise in niche marketing - doing a small number of things better than anyone else. As a result, they develop a reputation for quality and reliability in a specialist area.

Because of this focus, many franchises have developed a reputation for offering value for money - not for being the cheapest. There will always be businesses which sell purely on price, and during hard times a lot more will spring up. Many of these will fail because price is their only advantage and margins will always be squeezed.

Customer goodwill and a consistent reputation are major attributes which will help to retain customers and maintain margins. These attributes are reflected in the company's brand, and franchises which have developed strong brands are likely to perform more strongly than independent operators.

Maintaining Advertising

Companies looking for savings often find the advertising budget the easiest item to cut - it means no lay-offs, and because many people find advertising effectiveness difficult to measure accurately, cuts in this area may seem to have least impact upon a company's performance.

Yet studies throughout the recessions of the 20th century consistently showed that companies which have maintained their advertising spend even during deep depressions have not only fared better than budget-slashing competitors, but have emerged with improved market shares when the economy has recovered.

Most franchise systems include in their franchise agreement a marketing or advertising levy in the form of a percentage or flat fee which the franchisor is obliged to spend on promoting the business. This enforced spending is one of the main reasons for franchising's excellent performance.

Property

Property prices and leasing costs are always a concern for retail-based businesses, but this is another area where franchisees tend to fare better. A franchise with a good track record of attracting customers is going to find it easier to negotiate terms with a mall owner than an independent - especially in the current market. Franchise companies also tend to have more muscle and better negotiating skills, or know to use someone to negotiate for them. All these factors weigh in on the side of the franchisee. And the ability of franchisors to look at the performance of other stores in similar locations also helps in analysing the value of any particular site to ensure that the new franchisee is not over-committed.

Affordable Borrowing

The above points in favour of franchising are well-established. However, there are also some local factors which should encourage those looking at franchising in the near future. Low interest rates have made funding more affordable for new businesses. Most banks have now recognised the lower risk offered by proven franchise systems, and potential franchisees will find their bank manager takes a warm interest in any new venture, although that is not to say that finding funding will necessarily be easy - banks have tightened their lending criteria recently and any new venture will have to stack up financially.

Franchise Growth

There is one other significant factor that will aid franchising over the coming months, and that is the increasing number of people looking for new opportunities through necessity. We have returned to a situation where there are more well-qualified people realising that their jobs are perhaps not as secure as they expected or even being made redundant. Becoming self-employed and purchasing a franchise may be one path to a more secure future.

And while having new franchisees obviously benefits the franchisor, it also benefits existing franchisees. An enlarged network provides even greater awareness, a bigger marketing budget, more buying power, new ideas and experiences and a continuing sense of growth that has a positive impact on everyone in the system.

Positive Attitude

Above all, franchising enjoys a tremendously positive attitude about the future. While there is no doubt that we are in recession, franchise people seem not to get bogged down in the general doom and gloom that affects many industries. Franchisors and franchisees do not think like that - part of the franchisor's role is to maintain morale, and part of the benefit of being a franchisee is having others around with whom to share the experiences, problems and solutions. As a result of all the above factors several franchises, such as Fastway Couriers , are reporting increased demand for well-positioned products and services.

Of course, some franchises will out-perform others and some will have problems but disguise them - which is why you have to research any proposition thoroughly and take good professional advice. Nonetheless, the opportunities are out there and many franchises are well-placed to weather the current economic storms and come out on top.

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