Recession storm clouds looming: is now a good time to purchase a franchise? - Iridium Partners
Recession storm clouds looming: is now a good time to purchase a franchise?
General News

Tuesday, 22 November 2022

Recession storm clouds looming: is now a good time to purchase a franchise?

The old cliché. If I had a dollar for each time I have been asked this question, or heard the potential of a recession raised as a reason for not making the jump into franchising, well, I would not be writing this article, but more likely laying on a beach.

Whether we are, or are not, actually going to enter a recession is perhaps secondary to it being raised repetitively in the press – it’s on people’s minds and will influence their decisions. So, does it matter?

Franchising and economic cycles

There are always winners and losers in business over each period of an economic cycle.
Franchising on a single unit or business category is no different: some categories will do well in recession, sometimes because they are a trade-downs – Think local tourism and hospitality versus going overseas; Fast food versus full format restaurant; Home renovations and home services versus new build housing.

Some however may not fare so well, so it’s not fair to say, “Franchising is recession-proof”, but there are two unique aspects of franchising that stand out in a recession.

First of all, over time and economic cycles, franchised individual business units are more likely to be successful than their independent counterparts. So it follows that if you are thinking of starting a business, regardless of where we are in an economic cycle, a franchise is statistically a safer option.

Secondly, there is an interesting phenomenon whereby, historically, franchising grows over recessionary periods, the logic being that people often “buy themselves a job” after becoming unemployed or disillusioned over a recessionary period.

The New Zealand experience is more unique. During the last major recession – the GFC – New Zealand did not experience high levels of unemployment, but franchising grew. My theory is that the during challenging times, the efficiencies, purchasing power and the support envelope that franchising provides rises to the fore.

The combination of smart investors recognising this, and the Darwinism of lesser operators failing, results in franchise growth. So, franchising does relatively well during a recession.

What’s more relevant than the economic cycle?

When deciding whether it’s a good time to purchase a franchise I believe there are pertinent factors other than the point of the economic cycle.

Interest rates are a major influencer of not only the cost of borrowing for a potential business owner, but also an influencer of the ROI. This can be amplified by the level of borrowing. Higher rates increase costs and decrease affordability regardless of how they coincide with the cycle.

The relationship to property values and other capital is also critical. In New Zealand our concept of wealth is still emotionally tied to home values. High property values make people feel wealthy and often more likely to start their own business. From a practical point, it is a reality that this does influence personal balance sheets and the ability to borrow.

Franchising can be a positive option, and a reason to invest during a recession and potentially falling property values, because a franchise business may provide better returns.

What are your circumstances?

Finally, in addition to considering interest rates, borrowing capacity, and trying to ‘crystal ball gaze’ what sectors will fare best in a recession, I think the question is really, “What are your circumstance and what are you hoping to achieve?”

If you are looking to replace an income or de-risk becoming unemployed in a recession, then a relatively low capital franchise business may provide you that security.

If you are looking to invest in an asset and grow wealth, the support of a good franchise will certainly assist smoothing the waters and assist in preparing the boat for rougher waters.

So actually, recession or no recession, timing is what will work for you.