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Franchising - Current Economy Offers Great Incentives

Written by: Steve Vandegrift

Article Overview: As we approach the new year, many prospective franchisors wonder whether developing a franchise operation is a wise decision with the U.S. mired in a recession. Conversely, prospective franchisees wonder whether purchasing a franchise makes senses given the current economic climate. The quick answer to both...

Franchising - Current Economy Offers Great Incentives

As we approach the new year, many prospective franchisors wonder whether developing a franchise operation is a wise decision with the U.S. mired in a recession. Conversely, prospective franchisees wonder whether purchasing a franchise makes senses given the current economic climate. The quick answer to both is that it may not be.

A company that is looking to franchise their business mainly as a means of raising capital would probably be wise to defer franchising. Of course, a company in this position should probably never consider franchising, but that discussion is for another time. The same holds true for an individual who may be investing their last cent (and available credit) in purchasing a franchise business. In both cases, with the need for immediate revenue so great and little room for error, neither may have the staying power to survive through the current economy. At the very least, both would likely approach the endeavor with a mix of fear and trepidation...certainly not the best way to begin a new business.

This caution stated, it is exciting to share that the current U.S. economy actually offers incentives that makes franchising a business or investing in a franchise an excellent decision for many companies and individuals. Although franchisors in general have experienced a decrease in franchise inquiries over the past six months (our clients report 25-30% fewer leads on average), franchises are continuing to be purchased nationwide. In fact, one of our clients (ALOHA USA) announced in November that they had just granted their 25th franchise since beginning to offer franchises in August 2007.

So what incentives are there in this economy for a company to consider franchising?

First, in times of economic uncertainty the number of individuals concerned with their job status dramatically increases, which in turn leads some individuals to consider starting their own business. Due in part to the economy and mixed with a little "I've always wanted to operate my own business," some ultimately choose to start a business. For other individuals, the opportunity to accept a buyout or early retirement package is the motivating factor for considering starting their own business. In both cases, rather than waiting for the proverbial shoe to drop, these people prefer to take destiny in their own hands. Of course, many prefer to do so with the assistance and support of a franchisor.

In addition to the "currently employed" candidates, a recessionary period creates tens of thousands of additional "forced" franchise candidates, who come from the ranks of the "recently unemployed." Consider that with each ¼% increase in the unemployment rate, more than 350,000 people are added to the pool of prospective franchisees (another upside of high unemployment is the availability of qualified employees to assist in running a new business). Even recognizing that many of the recently unemployed will seek and find other employment (eventually), there are thousands of others who choose (and in some cases, are forced) to consider starting their own business. Many of these individuals take retirement funds, buyouts and/or severance packages with them when they leave their employment so from a financial standpoint, they are often ideal franchise candidates.

Which brings us to another affect this economy, and more directly, the stock market is having on franchising. With many investment and retirement accounts hovering somewhere below sea level, many people have opted out of the market. Now they are holding onto capital which they realize they need to invest somewhere. The question is where? Once again, some decide that investing in starting their own business is a good option, and what safer way than following the proven business model offered through a franchise system?

So what are the economy-related incentives for potential franchisees?

I will share three of the major ones. First, one of the key expenses associated with starting a franchised retail business is lease space and construction costs . With lease space going begging right now in markets across the country, many franchisees are securing lease space at discounts unheard of even a year ago. On top of this, landlords are increasingly offering high allocations for build-outs. In the last month, one client's franchisee successfully negotiated an increase in the landlord's build-out allowance by 300% (gaining an additional $40,000), while at the same time negotiating a 25% reduction in the lease cost.

Further incentives are available in the advertising and marketing arena. Many media are aggressively discounting advertising rates to attract business. It appears that we will see continued discounts from traditional media in 2009. The opportunity to advertise now at reduced rates can have a dramatic impact on a company's bottom line following the recession period. McGraw-Hill studied the advertising expenditures of companies during the 1981-1982 recession. They discovered that companies who decreased their advertising during the recession increased sales an average of 19% following the recession while companies who continued to advertise during the recession increased sales by an average of 275%.

A third economic-related incentive relates to the cost of borrowing . Although credit requirements are much tighter than a year ago, capital is starting to flow again (think $70 BILLION bailout) and is available extremely cheap to individuals whose credit history, net worth and available cash meet the new requirements. The difference lower borrowing costs make to a company that is undertaking a franchise development program or to an individual who is purchasing a franchise cannot be understated.

When determining whether now is the right time to undertake a franchise expansion program or purchase a franchise business, prospective franchisors and franchisees should first evaluate their financial condition to determine whether they have sufficient capital to survive if revenues fail to meet expectations. During a recession, it is especially wise to follow the adage, "Hope for the best. Plan for the worst." A thorough evaluation should also be conducted relative to the type of business being franchised. Is it in a industry that normally holds its own during recessionary periods? This alone makes a franchise business an attractive opportunity during good times and bad.

If both of these questions can be answered affirmatively, you may want to act now to take advantage of the incentives afforded by the current economy. In doing so, history demonstrates that you will be well-positioned to reap the rewards that come following a recessionary period.

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  Incentives Increase Profits
  The UK Governments Promotion of Franchising

Article Tags: busines, caution, economic climate, economic uncertainty, economy, endeavor, fear and trepidation, franchise business, franchise inquiries, franchise operation, franchises, incentives, new business, new year, own business, prospective franchisees, recession, six months, staying power, wise decision



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Re: Re Franchise etc - [quote="bmueller47":e0j0nu4t]Can you see a shift of various types of franchises? What I am thinking about is that today it is more difficult to create franchises, that has great appeal. More and more people want to have their business, but no interference of someone else.[/quote:e0j0nu4t] Not sure what you mean exactly but it is certain that more and more people want to have their own business but not more and more people know what they really want to do, or how to do it. And that's what franchising is all about. Franchising is not for an entrepreneur. An entrepreneur will do his own thing. People who buy franchises want a turn key business, with a proven model. Franchising in the US had never been that good. I don't have the exact numbers in mind but I know for sure that franchising is growing more and more as people are getting more and more aware of this business model.
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Great Article, chock full of info. - Ian, Thank you for linking your article regarding Licensing vs Franchising. Its a good read.


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