Franchising can provide a haven when the going gets tough

The economic forecast for the UK is grim. The mini budget that was unveiled by chancellor Kwasi Kwarteng on the 23rd of September caused the pound to fall to its lowest level ever against the US dollar.

Franchising can provide a haven when the going gets tough

The Bank of England reacted by franticly by buying bonds to stabilise the financial markets and ward off a liquidity crisis for pension funds. The national debt has risen yet again. Interest rates are widely predicted to be raised to 3% in November and later to settle for the medium term between 5% and 6%.

The continuing lack of productivity in the UK is likely to worsen, fears of a recession are growing and there is a world-wide lack of confidence in the UK economy. Russia’s invasion of Ukraine continues and is predicted to be a long-drawn-out war of attrition. The British Chambers of Commerce and Goldman Sachs have recently added their names to a long list of forecasters who are anticipating extremely difficult, or even recessionary, conditions in the short to medium term.

The number of job vacancies in the period from June to August decreased to just over 1.2m. This was the largest quarterly fall since 2020 and suggests that employers will gradually regain a measure of control over wage demands and find it easier to recruit and retain staff. Employees, on the other hand, will see average pay fall by at least 2.8% a year when adjusted for inflation. Even with the government support on energy costs, now reduced by the new chancellor Jeremy Hunt, rising food prices and higher electricity and gas bills are inevitable.

Taking all these factors into account, the short to medium-term economic situation is certain to be difficult. Those who remain in their present employment will see their salaries decrease in real terms. Those who are brave enough to leave and start their own business will benefit from the government economic stimulus strategy. But the move could be risky in such uncertain times. This is where franchising provides an all-important de-risking factor.

Franchising already makes a massive contribution to the UK economy and that is certain to increase. Those with the entrepreneurial vision of running their own business can mitigate the risks posed by these turbulent times and shelter under the umbrella that a franchise provides. Franchisors in the right sectors will find that funding for prospective franchisees will be made easier by the increasing levels of government and local authority assistance for small businesses. Interest rates will undoubtedly rise, and that will need to be factored into business plans, but even in a 5% – 6% range they should not be unsustainable.

Turbulent economic conditions always produce winners and losers. What this means for franchising is that prospective franchisees should be careful to avoid areas that are likely to experience difficulties. Any business that relies on imports will struggle against rocketing prices driven by a weakened exchange rate. Big ticket discretionary spending will undoubtedly come under pressure. Franchises that require large numbers of staff, such as those in the domiciliary care and hospitality sectors, will continue to be held back by labour shortages. Areas that are likely to do well are those offering essential goods and services where a local independent provider, such as a franchisee, can deliver a better service, at a lower cost.

For franchisors, and those who are planning to enter the sector, now is the time to run a safety check over their business model and method of operating. This is particularly important when it comes to recruiting new franchisees. A strong growth record or financial projections that are based on the buoyant trading conditions of recent years is all well and good, but is that momentum likely to continue? Can a new franchisee, with limited financial resources, sustain the two or three-year downturn or the recession that many predict? It may be better to postpone the launch of a new franchise until the economy has recovered, than see the first franchisees struggle and possibly fail. In an established franchise, it may be sensible to slow down the recruitment rate and concentrate on supporting the existing franchisees. All these factors are highly relevant until stability returns.

A fundamental tenet of franchising is that the franchisor will provide guidance and support for the franchisees. This will be seriously put to the test in the trading period that we are entering. Franchisors that levy a minimum monthly management service fee should consider suspending or reducing the charge and rely solely on the amount payable as a percentage of sales. If pain is being endured by franchisees it should be shared with the franchisor.

As always, difficult conditions will also bring opportunities. They certainly don’t justify adopting an over-cautious siege mentality. The underlying strength of franchising as a method of doing business is not in question. In difficult times it will provide security for franchisees that is not available to independent businesses.

The months ahead will provide an opportunity for the franchising industry to demonstrate its resilience and immense value to the UK economy.

Tony Bowman
Tony Bowman