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 firstname.lastname@example.org.