Why franchising performs well in a recession

When times get tough, franchising continues to hold its own. Legal expert Manzoor Ishani reveals why franchising performs so well in a recession

Those of us who have been involved with franchising for a few decades have now experienced a third recession. Is it worse than the one in the early 70s? In some ways it isn't. At that time people were paying 18 to 20 per cent interest on their mortgages and franchising, in the UK, was in its infancy. At that time we were all concerned that it would have a very serious affect on small businesses and on franchising, but we were proved wrong.

Large redundancies meant people without a job were disillusioned with the relative insecurity of employment, and with large redundancy payments burning a hole in their pockets, chose to try their hand at being their own boss by starting their own business. What better way to do so than to buy a tried-and-tested business system? Franchising flourished as a consequence.

One of the main reasons why franchised units perform better than managed ones is because the owner is behind the counter. Owners work harder than managers, make do with less and make greater efforts to keep their business going.

Another reason, which favours franchisees over independent traders, is franchisees have someone to talk to over a beer when times get tough.

An independent retailer is truly lonely in their predicament. They will seldom talk to a competitor and compare notes and although they will take some comfort in discussing problems of a general nature (high cost of borrowing, etc) they will not be able to discuss eroding margins, bad debts and supply problems.

Whereas, a franchisee is able to discuss their problems freely with other franchisees within the network, many of whom will be suffering also. Furthermore, they have the invaluable advice and help from the franchisor, who may also be a supplier and has the expertise and resources to make
a difference.

In my experience, franchisees have shared advertising, swapped stock (to keep down the cost of holding stock) amongst themselves - something that competing independent traders dare not do.

Franchisees have the power of the brand to sustain them through difficult times and, by pooling advertising money, are able to achieve a greater impact in the market than an independent retailer's budget. Franchisees are also able to negotiate more favourable trading terms from their suppliers via their franchisors.

The sum total of all these things, some small, some significant, help franchised businesses to ride out the storm.

So it's a small wonder that the failure rate of a franchised business, whatever the trading conditions, are significantly lower than for independent small businesses. Franchised businesses are less affected by recession than other forms of marketing and banks continue to see lending to them generally as low risk investment.

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