Franchising booms as recession-proof businesses beckon

Written on the 17 June 2009

Mirroring the recession in the early 1990s, the current economic downturn has again seen interest levels in franchises spike. Rather than fritter away their redundancy package many left jobless are looking to invest their payout on a franchise in what they see as recession-proof business investment.

“The franchising industry tends to pick up during a recessionary period because some very talented operators, middle and upper management, are as vulnerable as anyone to being retrenched. These sorts of people often want to take on the challenge of starting their own business instead of waiting for another opportunity in their previous career,” said Andy Simpkin, who has turned Australian franchise Café2U into the world’s biggest mobile coffee franchise.

Establishing a new business requires a lot of time and energy, and often far more than the set costs of buying a franchise according to Simpkin.

“Starting a new venture from scratch requires you to research the viability of the product or service and if there is a demand for it in your area. Building a brand profile and attracting a customer base can take years to achieve. In a recession these variables can prove a major barrier to profitability. A successful franchise has done the leg work for you.

Despite such optimism in the franchising sector Simpkin suggested franchisees must implement a number of strategies to help recession-proof their business.

“To succeed you must conduct regular cash flow forecasts, keep accounts easily accessible, know where your costs are and manage accordingly. Monitor outgoing expenses and you must endeavour to maintain your marketing budget. This is one of the first things businesses pull back on and it invites a case of out of sight, out of mind.”

The biggest barrier to taking on a new business venture during a downturn is the fear of failure, according to Simpkin.

“Negative sentiment can flow into all areas of your life in a recession and potential franchisees do fear they are taking too big a leap and won’t be able to make their business work. Franchisors still have to devise inducements and value-add to attract new investors.”

To overcome this common concern, Café 2U has introduced a ‘warming’ system on all new franchises, with an assigned Franchisee Development Manager building the business up to generate $500 a day before handing over the territory to the new franchisee. “In uncertain times, people really value this sort of certainty,” said Simpkin.

He believes the need to perform a franchise due diligence is paramount while searching for the right opportunity.

“You must assess whether the opportunity is actually going to be profitable. Another key consideration is the pricing of the product of service you are offering. Smaller priced items are less likely to be spurned in a recession, particularly items like chocolate, flowers and coffee. People will always find a way to afford small luxuries such as these.”

>> Find out more about Café 2U franchise opportunities