How will the franchise sector be affected by the impending recession?

Lawyer Fiona Boswell examines the current UK franchising marketplace and discovers there are valid reasons for optimism.

How will the franchise sector be affected by the impending recession?

Unlike many other business sectors, the franchise sector has often managed to thrive in economically challenging circumstances, such as a recession. This is due to a number of factors.

In many ways, a recession lends itself well to franchising because it often involves redundancies. This means there are often highly-skilled and experienced individuals that may consider purchasing a franchise as an alternative to working for others. By taking a career change, this would give them more control over their earning capacity.

These individuals may also have capital to invest, often because of redundancy payments. In past recessions, the franchise sector has seen a significant increase in the calibre and volume of new franchisees. This comes with its benefits, although those coming from an employment background will need to approach franchising differently.

They are not ‘buying a job’ but running a business with a proven model and system. Hence, those recruiting new franchisees will need to carry out due diligence to ensure that new recruits are the right fit for the brand.

Recessions can impact businesses that use franchising as a method of growth. As businesses experience tighter controls with loan finance and funding arrangements, their own plans for growth may be hindered.

Past recessions have witnessed a significant growth in the number of new and/or emerging franchise concepts. While it is good to see the sector grow, it remains important for franchising to be a viable choice for growth and not some last resort for an already failing concept. Otherwise, this can result in widespread franchise failures which affect the reputation of the industry as a whole.

Recessions often lead to a growth in the number of incoming franchise brands. International franchisors often look to expand during recessions. They enter new markets after reaching saturation point in their own countries.

The UK remains a favourable choice for those looking to expand abroad. This is due to the belief that there is less regulation in UK franchising than in other countries. Past recessions have therefore resulted in the growth of new franchise models in the UK. This is especially true of the domiciliary care and gym sectors, which are now prevalent in the UK. Domiciliary care is especially booming.

Incoming brands will need to be satisfied that their concept will be a success in the UK and it is always advantageous in being the first to market a new concept in a country.

Due to the current economic environment, and the impact of the pandemic, there are definitely opportunities for those looking to run a bricks and mortar-based franchise.

Growth in emerging sectors has, in the past, been hindered by a lack of available, as well as suitable, premises. This has resulted in disgruntled franchisees that have purchased franchises but have struggled to find a venue. But the current property landscape, with its low rents and plethora of vacant properties, has certainly opened up opportunities for new franchise recruits.

However, the cost of living crisis may well impact the growth of traditional franchise models in the hospitality sector. This particular sector has been badly affected by both the pandemic and Brexit, with changes in immigration law making margins tighter. Yet franchises in other sectors are experiencing a boom in their prospects.   

Past recessions have given rise to ‘fad franchising’ which is something to be wary of.

Concepts were franchised but many trends fizzled out overnight. These include cupcake franchises and ‘fish spa’ franchises.

These concepts create issues in franchising, with the potential for disputes further down the line. As these trends do not last long, franchisees are unable to enjoy a return on their investment. Therefore, approach these recession-led franchises with the utmost caution.

Also, remember that banks’ lending requirements – post-pandemic – are more stringent than ever. This is slowing down the franchise recruitment process. But loan finance options remain for those needing additional funding. There is the extended business loan recovery scheme, with banks’ lending up to 70% for a proven established concept.

Never forget that banks always prefer to fund franchises over new start-up businesses. Franchises are considered a more stable option, as growth will not be as impacted as much as with a conventional independent business.

Finally, difficult economic circumstances have often resulted in innovation within franchising. We have seen established franchising sectors successfully adapt their models to cope with tricky times. One example of this was the development of dark kitchen concepts in the hospitality sector.

During the pandemic, traditional restaurant models launched delivery services to run alongside their existing systems which created an additional revenue stream. It also provided new franchisees with a different financial entry level into the sector.

With a recession comes greater creativity. But to maintain a good reputation it is vital to ensure that new concepts are viable, sustainable and ethical. This also means the need for specialist advisors to assist you along the way, so you can make the correct business decisions.

Fiona Boswell
Fiona Boswell