4 Things to Keep in Mind Before Starting a Franchise During a Recession

No matter the type of business you launch, there will always be struggles along the way - but economic crises can accentuate the challenges. We believe there’s good reason to consider starting a franchise business during a recession, and we’ve created a list of the factors you’ll need to know about before getting started.

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While our natural instincts might encourage us to seek security in full-time jobs during times of economic instability, taking the calculated risk of joining a franchise can be more rewarding.

We’ve written about why starting a franchise business during a pandemic is a great opportunity, but financial crashes of all kinds can offer rare benefits. After all, Burger King, General Motors, Uber and Airbnb were all launched during economic crises. As long as you’ve got a great model behind you and are prepared for potential issues, there’s no reason why you can’t succeed.

4 factors to keep in mind when starting a franchise during a recession

Recessions add some complications into the mix for budding business owners; here are four of the key considerations you’ll need to think about before investing:

1. Lower customer spending

One of the most obvious changes to impact businesses during a recession is the drop-off in consumer spending. From B2C companies seeing shoppers put their money towards essentials, to B2B firms noticing commercial customers scaling back their expenses, many franchises struggle to maintain their sales figures.

Franchises usually have robust business models, but you can add a second layer of security by opting to join a recession-resistant sector.

2. New franchising opportunities

Franchisors have a vested interest in the success of their franchise partners, so they’re usually willing to go the extra mile to make sure investors have the support they need. For this reason, many franchisors put in place additional measures, such as new revenue streams and online resources, to help franchisees reduce outgoings and generate extra revenue during economic downturns.

As a new franchisee, it’s worth discussing opportunities with the franchisors you meet. Find out how they’re supporting their investors and use this information to guide you as you choose the business you’d like to join.

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3. Difficulties in raising capital

Prospective investors are likely to experience problems generating capital during recessions for two main reasons. Firstly, the unfavourable economic climate may have diminished their personal savings. And secondly, lenders will probably be less willing to part with their cash at a time when businesses are collapsing every day.

What’s more, friends and family members you might previously have turned to in times of need may also be struggling to stay on top of their finances.

Luckily, there are various ways to fund a franchise business with a limited budget. Read our article on the topic to get some inspiration.

4. Higher chance of cash flow issues

Depending on the franchise you join and the type of products and services it provides, you may find it takes longer to reach your break-even point than it otherwise would. Even a small reduction in sales can result in extra weeks or months spent working towards the day you finally turn a profit.

One way to reduce the likelihood of cash flow problems is to join a recession-resistant sector, but the best safety measure is to make sure you’ve generated enough working capital. Having a contingency fund will help you keep operating efficiently when your outgoings exceed your revenue.

People will tell you how crazy you are for giving up a high-paying job in the middle of a recession. Truth is, if you've got a model that offers value, people are always willing to buy from you. —W. Michael Hsu, owner of outsourced accounting services company DeepSky

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>> Read more:

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• Franchising 101: The Official Franchise Start Up Checklist (Part 2)
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• Franchising 101: 8 Signs You're Ready to Start a Franchise
• Starting a New Business Doesn't Always Lead to Immediate Success: Here Are 5 Ways to Change That
• It's Never Too Late to Start a New Business

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How to launch a successful franchise business during a recession

Starting a franchise business during a recession does throw up a few extra problems, but there are also many plus points when it comes to taking this route to entrepreneurship. Make sure you take advantage of these benefits:

• Recessions create problems and businesses can fix them. Explore franchises providing a valuable service or catering to new spending habits during times of economic depression, such as those in the home care, automotive or business support sectors.

• Lots of companies are forced to make employees redundant during times of economic hardship, which presents a rare opportunity for new businesses. It’s likely there’s a large pool of highly qualified workers looking for jobs, so you may be able to hire people who would otherwise be unavailable.

• During difficult times, businesses often create special deals to support their customers and the local community. Take advantage of any discounted supplies or free software trials, for example, which you can use to reduce your outgoings in those all-important first few months.

• It’s always cheaper and easier to focus on staff and customer retention, as opposed to attracting new employees and consumers to replace ones you’ve lost. From refining your recruitment scheme to exploring customer loyalty techniques, there are many ways to build on the network you’ve already established.

• When the business world isn’t operating as normal, entrepreneurs often turn to new ways of connecting with consumers. So, get creative and think about how you can communicate effectively, tactfully and persuasively with potential customers. For example, a new wave of businesses are currently exploring TikTok as an effective marketing platform.

As long as you aren't going to be their direct competition, small business owners are very willing to help new entrepreneurs. Develop these types of relationships in the outset, and if you need advice once you get started, you'll already have a foot in the door. —Edward Hess, American author and professor

Get help starting a franchise unit

Point Franchise is here to settle your concerns and questions about starting a franchise business, particularly when the economic climate looks less than favourable. Franchising can offer an exciting opportunity for aspiring and committed entrepreneurs, so why not take a look at our other franchise guides? Just use the search box to find the information you’re after.