Are franchises really recession proof?

As the recession settles in for the long haul, the number of redundancies continues to rise. Many of those who have found themselves newly unemployed were in well paid jobs and have found it hard to secure another job in the same field. As a result many are looking for an alternative to regular employment.

The current recession looks set to be different from previous downturns in a number of important ways, one of which is the demographic of those affected. Whereas in the 1990s it was industrial jobs that took much of the impact, in the naughties many of those on the dole queue are previously well-paid white collar workers. Some of these individuals have savings or redundancy payments behind them, and are looking to set up on their own.

Setting up a new business can be tricky, and it often represents a significant drain on even the healthiest of finances. Furthermore, finding a niche in which it is possible to turn a profit can be difficult. Given these problems, many individuals are looking towards franchises for the answer.

Franchising necessities

Buying a franchise has a number of important advantages. Primarily that if you choose your franchise business wisely, you should be buying into a tried and tested business model with a demonstrable track record. Consider the success of some of the biggest franchises; Subway franchisees, for example, benefit from an established brand, a loyal customer base, and the ability to draw on the resources of a large corporate structure.

While the purchase of a franchise can represent a significant expenditure (very few franchise directories list opportunities starting at less than £10,000), you will escape the huge investment that would otherwise be required to take a start-up to the same level as the franchise that you would be buying into. Furthermore, as Roy Seaman, Chairman of Franchise Development Services points out, giving up job security is less of an issue for prospective franchisees now than at any time in the recent past. If anything, a franchise is more attractive to many than employment because they can “take the lead through the…established customer base and market know-how of their parent franchisors.”

Franchisors and franchise consultants are at pains to stress the ‘recession-proof’ nature of their business. But how much truth is there in this claim?

Potential risks

In the first instance, it should be noted that no two franchises are the same. There is a virtually limitless range of franchisable business models, meaning that it is absurd to suggest that all franchises are immune from the effects of the downturn. Franchises will be subject to the same pressures as any other business during the recession, such as decreased consumer spending, reduction in corporate budgets, higher operating costs, and so on.

Furthermore, it should be remembered that franchisors (that is, the parent companies) will be acutely aware of the realities of the recession and its effects on their business. It is a fairly safe bet that they will prefer to shift expense or risk onto franchisees to as great a degree as possible, rather than shoulder it themselves. Prospective franchisees would do well to read some of the advice being given by consultants to franchisors. Parent companies are being told to tighten up their contracts, shift direct liability for lease payments to the franchisee, and monitor franchisees more closely. All of this suggests a greater emphasis on the responsibilities of the franchisee outweighing those of the franchisor.

However, there is certainly some truth in the claim that franchises are effective bolt-holes for those looking to be their own boss, but without the level of risk and expense of starting a new venture from scratch.

As has been mentioned, a good franchise will offer you the opportunity to walk into a ready-made job. Crucially, forced redundancy is not a worry, as you will be your own boss. Furthermore, an effective choice of franchise will enable you to take advantage of the parent company’s existing bulk purchasing power, and share in their existing strategies for coping with the downturn. It is, of course, in the franchisor’s interest that each and every franchisee turns a profit.

Outmanoeuvring the recession

It is also worth remembering that, in times of recession, it is frequently the smaller, niche-oriented firms that outperform lumbering corporations. As such, you may want to consider buying into a small franchise, with low overheads and a unique business idea. This can have the added advantage of a low initial capital requirement, although you should be careful to ensure that the business has a proven record of success.

Mitigating risk is a very prudent decision given the current climate, particularly if you are setting up in business for the first time. An effective franchise could be an excellent way to become your own boss, secure a job, and benefit from an existing corporate structure and established brand. However, the process of reducing risk begins with the choice of franchise. It is vital that the franchise you choose is safe, established, and above all fair. If you can tick all of these boxes, a franchise may well be a safe choice to ride out the recession - and to continue to profit well after the economic skies have cleared.