Franchising in a recession

Usually, it is said, that a recession is good for franchising.

With high redundancy rates and the attendant payouts franchisors often receive a boost to their networks in difficult times.

And, indeed, this recession is no different with many franchisor’s pipelines bulging with new enquiries from potential franchisees. I was talking with a franchisor just a couple of days ago and he was telling me that he just could not cope with the number of inbound leads he was getting.

No, the issue is not getting potential franchisees into the pipeline, it’s getting them out the other end. The difference between this recession and others from the recent past is the Credit Crunch. Although there are lots of high quality people looking for something different in their lives and determined not to find themselves in the same position in ten years time, it’s the finances that are the issue.

Potential franchisees are applying in their droves to franchise operations without really understanding the total financial commitment needed to make a success of the business. And, to be fair to franchisors many of them have excellent operations, products and recruitment processes. They motivate their potential new recruits so much that they want to follow the process all the way through to the bit where they have to raise funds.

And that can be where it goes wrong. Very rarely does the redundancy cheque cover all the financial requirements of setting up a franchise. It’s not the franchise fee – the upfront cost of buying into the franchise – that’s the issue, necessarily. It’s quantifiable and everyone knows it has to be paid. It’s not even the capital expenditure that some franchises need. Once again, it’s all pretty easy to see and understand.

No, it’s the working capital needs of the business over the first few months that can be the real deal breaker. Even with the most aggressive marketer it takes a period of time for an operation to get off the ground and generating income – sometimes a few weeks, sometimes many months. Franchisees often forget they need to live through this time as well as feeding the business with working capital. It can be even more dangerous if the franchisee doesn’t need to draw money for themselves, maybe because there is a second income in the family. They forget the need to invest money into business growth, into sales and marketing. They think they can do it on a shoestring and, as a result, the business doesn’t quite get off to the start they were looking for and they don’t make the money they need.

Franchisors can mitigate some of these issues by being ultra careful in helping franchisees get the finances right at the outset and only allowing them through the pipeline when they are sure that funds are in place. The first part of this process is to ensure the business planning process for franchisees is robust – so they understand the commitment needed.

Even so, it takes a strong franchisor to persuade a franchisee desperate to join that they haven’t got enough capital, even when there’s enough money in the pot to cover the upfront expenditure… but it’s a trap to avoid simply because it’s saving up a world of trouble for later by grabbing at some short-term income today.

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