I often hear, usually from franchise recruiters, that recessions are "positive" for new franchisee recruitment because new entrepreneurs enter the market. Mid-career executives find themselves downsized and use retirement funds, severance or credit to launch a business. The new business creates income and the opportunity for personal reinvention. Younger candidates may eschew corporate life altogether and bet on themselves via franchising. While historically accurate, I have always abhorred the underlying tone of "recessions are good for franchise recruiting," and wish people would stop using it. Also, so much is different this time.
This recession is unlike others
Social distancing kills demand unlike prior recessions. Delivery and internet alternatives can preserve cash flow for some. Basics like elder care, car/home repairs, and supplies are still needed. But it’s impossible to deliver a trampoline park experience, haircuts, swim lessons or daycare via the internet. Consumers (and employees) will rein in spending if they’re locked down, furloughed or laid off. This recession will teach future franchise candidates new lessons about risk, brand resilience, supply/demand, and which businesses are "necessary." Brands that claimed recession resistance must prove it.
Also different this time is the number of people engaged in the gig economy. According to the U.S. Bureau of Labor, independent contractors were 10.1 percent of the U.S. workforce in 2005, 15.8 percent by 2015 and then exploded to 36 percent, (at least 57 million workers,) by 2019. Displaced gig workers don’t receive severance to fund a new business. Meanwhile, newly displaced corporate workers may choose low-risk contract work rather than opting to start a franchise.
Whereas in past recessions starting a franchise business may have looked less risky than the job market, now owning a business (or certain types of businesses,) will probably look riskier. Gig work is entrepreneurial by nature. Increasingly, franchisors will be forced to reframe recruiting messages to compete with the gig economy.
It’s also more crowded this time. According to FRANdata, out of 4,000-plus U.S. brands, 1,740 started franchising since 2012. We lack recession performance data for these newer concepts, but we’re about to learn in real time. The strongest brands remaining after this crisis will ultimately see improved lead flow, deal conversions, private equity interest and lender support. Eighty percent of net unit expansion was already attributed to the strongest 26 percent of brands. This recession may alter the list of top brands, but should strengthen that group’s grip on recruiting and investment. New brands face an increasingly steep climb to break out.
The candidate pool is also changing. During the last recession, displaced baby boomers were the majority of new franchise starts and represent 60 percent of franchise owners.
Gen Xers and millennials may have different capital access, attitudes toward risk, and may value different types of franchises. With such a high boomer owner base, resale competition is also likely to be higher this time around.
Moving forward
This recession, like others before it, will bring new candidates to franchising. It will also force dramatic changes to your development process.
First, focus now on existing franchisees’ revenue and profitability. Avoid closures. Provide tangible benefits to being part of a franchise system, especially during hard times.
Deferring royalties/lease payments/fees, ramping up technology solutions, personal guarantee insurance, additional operations support, private equity loan pools for franchisees, and pre-negotiated buy-backs are only a few examples to help franchisees. "We’re all in this together" will fall flat with owners without real solutions (especially regarding cash flow) and visible burden sharing. Every candidate you have for the next decade will ask what you did to help your franchisees during this extraordinary time.
Work with landlords and suppliers to secure relief and provide options for franchisees. Franchisees can improve their monthly debt carrying costs or can access inexpensive (via the SBA) disaster funds. If franchisees initially pledged their homes, they can potentially change loan products to remove liens. Ask your lending partners to provide assistance to help franchisees navigate this complexity.
Be thoughtful about your conversion program. Although independents may now see more value in your brand and support, only consider open markets. Focus on your existing franchisees first.
Cut back, but don’t stop, franchise development. Maintain forward (even if slow,) momentum. If you stop completely, momentum will be incredibly difficult to rebuild. Increase franchisee resale assistance. Preserve cash and limit lead generation spending for now. Focus on your most productive channels and LinkedIn, where people will be looking for new career options. Stay connected to the broker community. Maintain international efforts as well; long-term trends remain strong. Outsource development if needed, but keep working with candidates.
When the dust settles, all of your franchise development content must be updated. Anticipate a complete overhaul. Also, consider releasing a supplemental FDD. It won’t be enough to declare 2020 an anomaly. Buyers will have permanently different perspectives regarding risk, contract language, fees and personal guarantees. Buyer definitions of "recession resistant" and "essential" businesses will change. Your franchisees will have new information to share regarding brand resilience, how fast demand and cash flow bounced back, and especially what assistance they received from you. Your content must reflect this new information.
Encourage your team to remain sharp, disciplined and supportive of each other. Help your franchisees and employees get through. Make your voices heard with lawmakers via the International Franchise Association. Franchising, small businesses and entrepreneurs themselves remain critically important to our economy.
This column's author bio has been updated: Alicia Miller is the founder and managing director of Emergent Growth Advisors. Her Development Savvy column covers smart ways to market and grow a franchise. She is also the author of the forthcoming book, “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.” Reach her at [email protected].