Economic uncertainty and layoffs across corporate America have led budding entrepreneurs to enter the world of franchising.
Today, even as the world reopens, challenging COVID-19 safety regulations remain in place, leaving business owners to wonder whether they will be able to survive another day. But some businesses did survive and thrive – despite the coronavirus pandemic.
Franchised businesses are among the few success stories of the global pandemic of 2020. Due to the unique circumstances of these times, this success story warrants further examination.
In December 2020, almost no one even knew what a novel coronavirus was. Come March 2020, when the global pandemic ensued, no country, no human being, was left unaffected by the devastation in the wake of the COVID-19 virus. U.S. governors exercised their emergency powers to shut down their states, forcing businesses to shutter for months.
As the crisis continued beyond the initial six weeks of lockdown, small businesses struggled to make payroll and rent with 50 to 87 per cent in revenue reductions, as a 2020 Small Business Financial Health Survey determined, and were soon forced to lay off millions of employees.
Although it seems counterintuitive, this massive rise in unemployment contributed to a boom in franchising. Many other pandemic-related factors have also contributed to this surging interest in franchises. These same factors also tend to reappear cyclically in times of terrible economic crisis or contraction.
Economic recession kick-starts innovation
History shows that times of desperation also bring innovation. Some evidence of this trend goes back to the 14th century when looking at the aftermath of the Hundred Years War.
The war, which lasted from 1337 to 1453, devastated much of France and laid waste to valuable farmlands. This period also brought countless deaths – one-third of Europe’s population died due to famine and the Black Death. But with that tragedy came a new focus on reviving agriculture – critical to the economic recovery throughout Europe.
Post-war, new innovations in farming began to appear. Farmers began alternating their use of land between arable and pasture every five years – a critical contrast to the practice of medieval open-field agriculture.
In 1534, an author named Master Fitzherbert even recommended an advanced form of mixed-farming agriculture before the advent of modern fertilizers in his book, The Boke of Husbandry. This period sowed the seeds for the Agricultural Revolution which is considered to have begun in the 17th century and continued throughout the centuries that followed.
Fast forward to 500 years to the SARS (SARS-CoV) outbreak that spread across Southern China in 2002 and the drastic impact this pandemic had on the world. Yet again, the same trends of innovation and entrepreneurship appear in reaction to the era’s social and economic instability.
For example, Alibaba was founded in 1999 as an online B2B marketplace but, in a lesson for today’s times, survived and thrived despite this pandemic. By 2003, the SARS outbreak became a full-fledged pandemic and shut down China’s manufacturing sector. As a young company, Alibaba was hit at the worst possible time. Alibaba sent their workers home, but workers took their desktop computers with them to keep the company’s e-commerce platform operational, working 12-hour days. As people began to quarantine, Chinese consumers turned to the internet and, instead of going bust, Alibaba boomed.
So how do you discern business opportunities during a pandemic? When the economic cycle looks bleak, how do you find the silver lining?
On the upside or the downside of economic cycles, there is a domino- effect across a wide range of industries, and understanding your business’ place in the supply chain is critical to success or failure. Long- and short-term planning is key, and it is one of the reasons why, in 2021, there is so much interest in franchises. A business blueprint and an experienced support staff are part and parcel of the franchise industry model.
Economic pressures lead to self-examination and self-investment
Typically, when layoffs occur in one industry, it has a ripple effect across a wide variety of industries. For instance, when COVID-19 shut down the hospitality industry, tradeshows and conferences were also canceled.
This impacted the entire supply chain and financial ecosystem, devastating the airline and travel industries, decimating catering and food vendors, as well as logistics and freight businesses.
Psychologically, desperate economic pressures often force people to re-evaluate themselves to survive. While COVID pushed many businesses and individuals to file for bankruptcy, for others, it opened the door to reinvention and entrepreneurship.
Franchise sales tend to increase during periods of high unemployment that include the top end of the salary scale. Since at least 10 years have passed since the last economic recession, those top-earning wage earners had significant personal savings, retirement accounts, and home equity – sufficient capital to invest in franchises.
Moreover, during times of economic uncertainty, those with access to that kind of capital often choose to invest in themselves rather than the job market. The prospect of starting a new business is exciting and daunting – especially during a pandemic. However, for many, the benefits of franchising during a tough economic cycle outweigh the negatives.
Let’s discuss the top three reasons why people turned to franchising during the 2020 COVID-19 pandemic and uncertain economic cycles:
1. Access to debt capital with low-interest rates
During the COVID-19 pandemic, the Federal Reserve kept its benchmark interest rate near zero due to the coronavirus. In fact, the lowest Fed rate ever recorded was in March 2020 at 0 per cent to 0.25 per cent, and the Fed pledged to keep it in that range until 2023.
For several reasons, this is an attractive financial proposition to an entrepreneur or small business owner. First, unlike private loans, the interest fees and charges on debt capital is tax-deductible. Moreover, unlike equity financing, debt financing gives a business owner or franchisee complete control over his or her operations.
In addition to the low-interest rates, we also often see franchisees tap into their savings – including their retirement accounts, such as 401(k), to pay for the high up-front cost of a franchise. However, franchisees are also positioned to recoup any personal loans to the franchise once the company becomes profitable.
2. The franchise playbook
Franchise systems also provide franchisees a successful business model or “playbook.” This playbook includes a franchise’s know-how, procedures, intellectual property, brand, and right to sell branded services and products in a specific geographic “franchise territory”. This helps ensure the franchisee that there will be no encroachment on its customer base by another franchisee in that region.
Franchises also provide strong brand awareness. This, in part, is helped by national advertising, which is paid for from a pooled funding cooperative to support regional franchisees and build name recognition.
“Franchised businesses are among the few success stories of the global pandemic of 2020”
Franchisees also receive pre-opening and post-launch support with training, capital resources, and site selection. By “buying” into an experienced team and proven system, this, arguably, lowers the risk of beginning a new business operation.
3. Stronger business opportunity for success
Franchisees are also buying into a sense of security. The International Franchise Association’s data reveals that 92 per cent of franchise businesses are still operating after five years in the United States.
Comparing this statistic to the fact that 50 per cent of small businesses nationally fail after five years, franchising is the more lucrative and secure option for those looking to venture out into the world of entrepreneurship.
Will this trend continue?
The industries hit the hardest by the pandemic are slowly finding their way back to a new normal. So, will the franchise boom continue into the second half of 2021?
Several key economic indicators point to continued growth in the franchise space – especially in the second half of 2021. First, at the end of 2020, the unemployment rate was at 6.7 per cent – a high rate.
This allows new franchisees access to labor at a cheaper cost. The pandemic also forced the closure of thousands of businesses across the country, creating a glut of commercial real estate at historically low rental rates. These bargain prices are another potential driver for the growth of the franchise industry in 2021.
“While COVID pushed many businesses and individuals to file for bankruptcy, for others, it opened the door to reinvention and entrepreneurship”
After the business pain and suffering of the pandemic, entrepreneurs have become nimbler with the ability to support a remote workforce, increased their e-commerce capabilities, and found new revenue streams that do not depend on a physical storefront.
Business owners have learned how to scale up or scale down a workforce and how to make strategic budget cuts to survive. Entrepreneurs also learned which types of businesses perform well in a pandemic, including food and goods-related delivery. It is these franchise sectors that are also likely to experience the most growth in 2021.
The pandemic has also caused a general shift in the way people do business. Many industries have now taken a new mobile-first approach, such as restaurants with menus and ordering and logistic companies for last-mile delivery. This accelerated movement to the web and the digitization of many industries presents many new opportunities for change. When this happens, existing businesses have a harder time retooling than new businesses.
Finally, entrepreneurs who took a “wait and see” approach over the last year and a half are also more likely to make their franchise purchasing decision now as the country continues to resume normal business operations.
Consequently, this is a “perfect storm” of opportunity. Low-interest rates for a continuous period and historically low retail rental rates – two key factors that are creating ideal conditions for strong economic growth, beginning in the second half of 2021.
Lil Roberts is CEO and founder of Xendoo, a cloud-based fintech company based in Fort Lauderdale that specializes in online bookkeeping and accounting focused on the small business owner. She is a serial entrepreneur with a passion for small business and is known as an innovator with an enviable ability to foresee market trends.