Franchising in a downturn

A shrinking economy can actually be a good time for franchising, as many successful brands have proven

Recession. Is it going to arrive this year? A Bank of England statement in September 2022 said it was very likely – the figures were later changed so the outlook didn’t look quite so bleak, but that was before the market reverberations created by the government’s disastrous mini-budget the following day. Recession remains, at the very least, a looming threat.

Before you decide that investment is out of the question until the threat of recession subsides, there’s something you should know: a recession can be a good time to get into business with a franchise.

Franchising commonly thrives in recessions - partly because businesses see franchising as a lower-risk way to expand a business, so they may consider launching a franchise, and partly because there are more people in the employment market with redundancy payouts who decide to invest their money in a franchise.

So, don’t let the threat of recession deter you from starting a franchise. Some of the biggest names in the corporate world started in recession, and choosing to start your own business with the support and backing of a franchise is probably a safer move than starting up all on your own.

The threat of recession means you need to take more care when choosing your franchise. Some claim to be recession-proof, but no business, franchise or otherwise, can guarantee that. Consultant Len Rainford, The Franchise Specialist, says: “In a recession, some companies which are fearful of going bust will start offering franchises as a rather desperate way to raise money.

Prospective franchisees need to be extra careful before investing.” Keeping that in mind, here’s what to look for when choosing a recession-resistant franchise.

Sector-specific

Some sectors are more recession-resistant than others. Some goods and services are always likely to be in demand, such as homecare, delivery, home maintenance, and those where people are reluctant to cut back on spending, such as children’s and pet services.

Research the history of the sector you have in mind – what patterns of consumer behaviour does it reveal over time?

Sarah Robertson, group director and UK managing director at TaxAssist, whose franchisees provide accountancy services to small and medium-sized businesses, says: “Accountancy is a resilient industry because its core services are always in demand. Whatever the economic climate, businesses seek out tax advice and are required to prepare annual accounts and submit tax returns.”

Look for recessionproof surprises

Some sectors that survive recessions well might surprise you. Ginny Murphy, chief executive at wheel refurbishment franchise, The Wheel Specialist, says: “When times are good, new car sales are up; people have more disposable income to spend on things like customising their alloy wheels. When times are bad, the used car market may be more appealing - perhaps people will look to repair and refurbish an existing vehicle rather than buy a new one. Either way, The Wheel Specialist can capitalise on these trends.”

Jon King, The Wheel Specialist Cardiff franchisee, says: “We opened in 2010 at the tail end of the Great Recession. From day one, the CRM system and marketing helped bring business through the door. The work is always there. Even though it’s a premium product, I think it’s pretty much recession-proof.”

Despite the Covid downturns of 2020-21, 93 per cent of franchisees with the Wheel Specialist broke previous individual records in 2021. In the first quarter of 2022, franchisee monthly turnovers hit unprecedented levels.

However, remember that being in a recession-resistant sector doesn’t guarantee survival of any individual franchise.

Adaptability and innovation

Look for franchises that evolve and adapt to suit the market. Sarah points out: “With the loss of the traditional High Street bank manager, there’s a gap that TaxAssist franchises are filling, as people seek a trusted advisor for their business and personal financial affairs. Their skills and expertise help clients navigate uncertainty and plan for the future. TaxAssist has recently launched TaxAssist Financial Services, which offers huge growth potential for franchisees.”

George Pomfret, the franchise recruitment manager at The Wheel Specialist, says: “We have solid experience in supporting our franchisees during economic downturns and uncertainty. We’re always adding to our support, improving and developing the franchise model, and trialling new equipment or technical processes to support our franchisees.”

Franchises which offer a range of services may also be less risky because they offer multiple revenue streams.

Look for history

Franchises that have successfully survived previous economic fluctuations are likely to be better prepared for downturns. Research the history of the franchise and quiz the franchisor.

Be extra vigilant with new franchises. Has the franchise model been tested with a pilot franchise? Who are the people behind it and what is their experience of the relevant business sector and the franchising industry? Len advises: “If the franchisor won’t tell you the full story of the franchise, including their reversals, think twice.”

Financial stability

Research the company’s accounts on the Companies House website. Get guidance from a franchise specialist account.

“Check the profitability of the franchise,” advises Len. “Franchises require a high level of profits to remain viable because the biggest percentage of the profit margin goes to the franchisees, who typically retain 85-90 per cent of their own profits.”

Steady growth and solid support

Very swift growth, such as adding 50 franchisees in 18 months, can be a sign that a franchise is furiously selling franchises because it’s desperate to bring in funds. If it’s got a tiny head office and dozens of franchisees, has it got the infrastructure to support the franchise network through a downturn or recession?

Andy Thompson

“Look at the resilience of franchises in the network”

Andy Thompson was the first franchisee with The Wheel Specialist, launched in 2007. “I was keen on cars and from looking at the market I could see that new cars were being made with alloys instead of the old steel wheels, so it was clear that the market for refurbishing alloys would grow,” says Andy.

Within months the 2008-9 recession hit. “The 2009 recession meant that younger clients who wanted the colour of their wheels changed no longer had the spare cash to spend, so we lost that business,” he says. “But at the same time, instead of buying new cars, people were tidying up their old cars instead, so we gained from that.”

His business has survived the 2009-10 recession, plus economic pressures caused by swine flu, terrorist attacks, heat waves, flooding, Brexit, and the recessions caused by the Covid lockdowns. He advises others seeking a recession-resistant franchise to look at the resilience of the franchisees in the network as well as that of the franchisor.

“Resilient franchisees look at developments in their market and change strategy accordingly. For instance, when the diamond cut wheel sector started growing, we invested £50,000 in a diamond cutter, and we’ve reduced turnaround times as customer expectations have increased.”

Andy adds: “The ability to set business strategy is important to recession resilience. You need to be able to step back and work on the business, rather than in it. A good franchise helps with that because you can benefit from ideas and methods shared from the whole franchise network as well as the franchisor.”

Kam and Sejal Sira

“We had a strong growth mindset”

Kam and Sejal Sira launched their TaxAssist Accountants franchise in Watford in 2010. Former lawyer Sejal says: “It was at the height of the last recession when Kam was made redundant, and knowing that accountancy services are always in demand, we took the chance to start our own business with TaxAssist.”

Kam says: “I was looking to work for myself using skills I’d built up over my accountancy career, but wanted the advantage of the support that a franchise offers. The vast reputation and success of TaxAssist gave me all the confidence I needed to join the network.”

The couple raised the necessary payment, which included a loan from NatWest, arranged with its franchise lending team. “We had to draw up a business plan – not a huge problem, given our skills – but the team as the Support Centre assisted us,” says Sejal.

It helped that they were starting a franchise business. “We had a strong growth mindset and lots of guidance from the Support Centre about marketing, social media and networking. Business leads started coming in immediately,” she says.

The couple now owns two shops in Barnet and Watford and an office in Borehamwood. “During the lockdown, we contacted clients offering our expertise and we helped many of them access government support schemes,” Sejal says. “We were busier than ever at this time, and making this kind of goodwill gesture means we’re more likely to keep clients.”

Kam adds: “Recession can bring opportunities. Redundancies mean people start new businesses and big companies swap their accountants for smaller ones to cut costs. Companies leave the market and businesses looking for efficiencies change suppliers. We are signing up two or three new clients a week, even under lockdown.

“A recession can be a good time to start a business. My wife and I work together in our practice and we haven’t looked back.”

Barney Davis

“Franchising offered more security and stability”

Barney Davis launched his Caremark home care franchise in Warwick in September 2020, the year that COVID caused a six-month recession.

“In October 2019 I was unexpectedly made redundant after 20 years in the wine industry. I wanted to do something for myself in a sector that was more personally rewarding,” he says. And he chose the home care sector, adding: “Franchising offered more security and stability than going into business on my own.

“Even though I launched my business in a pandemic, through hard work Caremark Warwick has grown consistently month on month. We soon collected two accolades: the Caremark Milestone Award for reaching 500 hours of care provided, and a local business award for New Business of the Year. Within 18 months I was enjoying the satisfaction of seeing my dream become a reality and enjoying a better work/life balance.”

Barney adds: “There was a lot to learn but it was good fun. In addition, I have the expertise of my regional support manager to tap into.”

Now, regardless of economic conditions, he plans to keep growing and expanding his care service. “We are on track to reach our targets,” says Barney. “I’ve come a long way since 2020.”

We started in a recession

Puregym:

Now available as a franchise, PureGym started in Leeds in 2008 during what was the worst recession since the Great Depression of the 1930s. Today, it’s one of the largest gym and fitness operators in Europe with 1.6 million members across more than 500 gyms.

Wilko:

The homeware store started in Leicester in 1930 at the height of the Great Depression.

Hays Travel:

Founded in 1980, during a five-quarter recession that lasted until 1981, Hays Travel is now the UK’s largest independent travel agent. It includes the Explorer Travel franchise.

Sage Group:

Founded in the spring of 1981, the small business software supplier is now the UK’s largest technology company (and its products include franchise accounting software).

Pets at Home:

Founded in 1991 during a recession, it’s now the UK’s leading pet retailer.

Graze:

Now an international company, Graze was founded in 2008, during the deepest recession in the UK since the Second World War, delivering healthy food and snacks through the letterbox to subscribers.

What is a recession anyway?

Recession is one of those scare-inducing words (inflation is another) that media economics correspondents love to use, partly because it means their stories are more likely to lead the news. But what does it really mean, and should you be afraid of it?

Normally, the UK economy grows, but sometimes it shrinks. When it does that for two quarters in a row, it’s said to be ‘in recession’. We had a year-long recession in 2008-9, and a six-month Covid-linked recession in 2020. Companies tend to restrict investment, and may cut recruitment and make redundancies – but redundancies can power the growth of franchises, so a recession is not all bad news. If you’re reading this you’ve almost certainly lived through two already.

The author

Linda Whitney writes about franchising for the Daily Mail, What Franchise and many other publications