Franchising is an American institution. From where you go to eat
lunch, get your hair cut or have your oil changed, franchising in the last
30 years has changed the business
landscape.
As the U.S. economy continues to take
its lumps, certainly the stream of franchising must have slowed down, ready
to pick up again when the economy
starts to turn things around. However,
that’s not the case, as franchising numbers actually go up during a recession.
“Good franchise concepts that provide
a good value are going to flourish for
two reasons,” says Eric Riess, practice
group manager of corporate and franchise groups at Greensfelder, Hemker &
Gale, P.C. in St. Louis. “One, the enormous pool of prospects available and,
two, because during a recession, people
aren’t spending less, they’re spending
smarter.”
Smart Business talked to Riess about
how franchising increases when an
economy is in a downturn.
Wouldn’t franchising slow down during a
recession?
Actually, it flourishes for two reasons.
One, there are going to be more potential
franchisees looking for potential opportunities in a recession than there are
when times are good. Why? There are a
bunch of executives getting laid off or
encouraged to take early retirement.
Those folks generally have money, business experience and don’t feel like their
days in business are over.
The other issue is, ‘Aren’t people
spending less?’ That’s hooey. Let’s not
start believing what our government is
feeding us. Have you been to an
Applebees lately? Do you really think
people are spending less money? People
are looking for value for their buck.
That’s why Target is gaining market
share on Wal-Mart like crazy. People
believe that Target gives them a better
value even though they’re spending a bit
more money at Target than they would
at the Wal-Mart. The same is true in regards to the franchise industry as a
whole. You’re local Mexican food chain
may not being doing too great, but if you
look at your restaurant concept that
actually provides good value for the
money, they’re doing quite well. We
could go through a list of restaurants,
and I use restaurants because they seem
to be synonymous with franchising.
What types of businesses franchise more
during a recession?
People used to think the next line was
a joke, but if you take time to think
about it, you can’t get your car gassed
up, your carpets cleaned, your lawn cut,
your family fed and, recently, some of
your health care services provided without going to a franchise. Franchise
stores are all over the place. Every time
you go to the mall, just about every store
in it is franchised except the anchor
store, which generally is not.
Franchising, in general, covers a wide
array of goods and services. The ones
that are flourishing today are the ones that people can get involved with by
investing $250,000 or less, and here’s
why: One, people want to buy a franchise where they can purchase multiple
locations. People need a decent income;
people involved in franchising are looking to make $100,000 or more a year.
Also, many of these franchises are sold
quickly because third-party franchise
brokers sell them. They get paid the
same to sell a $2 million franchise concept, which may take a year to sell
because it takes a long time to get up
enough investors, as they are to sell a
$250,000 franchise concept. In the time
in takes to sell the $2 million concept,
that broker can sell 10 $250,000 concepts. Would you rather have one commission or 10 commissions?
When the recession ends will franchising
slow down?
Yes. Oddly enough, franchise growth
slows as the economy improves as there
are fewer people looking to invest. There
are fewer executives being laid off and
the stock market becomes a formidable
competitor to investing your money in a
business. Would you rather invest in a
stock that will double in value in the next
12 months or take that money and buy
three sandwich shops and work your
butt off to make $150,000 to $200,000 a
year? Plus, there are other options
besides the stock market, such as real
estate. Would you invest in real estate in
today’s market? No. When the economy
comes back around? Of course.
The economy is completely cyclical,
and there is no need to panic over the
recession. We’re going to see higher
interest rates, inflation and a recession.
However, once those things peak, the
economic cycle will go back up. It
always does.
ERIC RIESS is the practice group manager of corporate and franchise groups at Greensfelder, Hemker & Gale, P.C. in St. Louis. Reach
him at (314) 345-4723 or [email protected].
