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Franchising in a Pandemic Economy: Is It Worth the Risk?

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As of May 2020, the pandemic has shut down about 100,000 small businesses in America and sent 20.6 million jobs down the drain. This figure is even more dismal than the unemployment rates during the 2007-2009 Great Depression, which peaked at 8.7 million lost jobs.

But as in any dark time in human history, there’s always a silver lining, and abysmal situations offer an opportunity for unprecedented growth. The economy will recover, the U.S. Chamber of Commerce itself says, but businesses would have to adopt new practices to bounce back. Meanwhile, new entrepreneurs would have to weight things thoroughly before they enter any industry.

The franchising sector is at the same crossroads. It seems riskier than usual to invest in a franchise or franchise business in a pandemic recovery, but if you make the right decisions, the rewards are worth it.

A Look into the K-Shaped Recovery

While other economic crises have spurred a V-shaped recovery, where the steep economic decline would invariably lead to a steep recovery, the pandemic is a new kind of foe. Experts now predict a K-shaped recovery, where some businesses would recovery rosily, while some would remain in free fall.

Whether a business climbs or continues to fall depends largely on the industry it belongs to.

In the upper arm of the K-shape are the sectors that are vital in everyday life, support remote work and online classes, and keep food and supplies flowing into homes. These include groceries, convenience stores, medical suppliers, technology companies, and some segments of the retail industry. These businesses are essential in the new world, and they are unlikely to suffer even if the crisis abates because they simply enable people to adapt and survive. In fact, these businesses keep the stock market hovering around all-time highs.

In the lower arm of the K-shape are sectors that depend on large gatherings and mobility, such as entertainment, leisure, hospitality, and food service. Social distancing and quarantine are a bane to these businesses, as it is their nature to bring people together or move them from one place to another. Even if they are innovating and adapting, they still experience thin profit margins and diminishing revenues.

Those in the upper arm are also the first to recover employment numbers. For instance, the financial services sector has already brought back 94% of its pre-pandemic employment. On the other hand, leisure and entertainment restored only 74% of the lost workforce.

When deciding upon a franchise, a budding entrepreneur should go beyond studying how to start a franchise business. They have to keep the K-shape recovery in mind, so you can choose the business path that is more likely to generate a robust bottomline.

Factors for Franchisor Success

For franchisors, it’s also important to explore why a pandemic is the best time to consider franchising your business. There are three key factors that drive an uptick in sales in franchises.

  • Unemployment — High levels of unemployment mean more people would be looking for a stable source of income. The pool of unemployed individuals during a pandemic is different from unemployed individuals at any other time. Many of these people are highly competent in their fields and occupy the higher end of the salary market, but are unfortunately laid off because of the extreme effect of the outbreak. These people are well-qualified and often have a high potential for success.
  • Debt Capital — A huge, ready-to-access debt capital at historically low interest rates is made available. This gives people more power to invest in a business.
  • Savings — After over a decade’s worth of growth since the 2007-2009 recession, people now have access to substantial savings in the form of retirement accounts, personal savings, and home equity.

As such, a pandemic creates a good opportunity for franchisors to franchise their brand.

Take a look at the top franchisors during the pandemic. 7-Eleven, Ace Hardware, and FASTSIGNS all have something to contribute to daily survival. 7-Eleven allows easy access to essential items, Ace Hardware enables home improvements, while FASTSIGNS created new signage for social distancing, mask-wearing, and hand washing.

If your brand belongs to the sectors in the upper arm of the K-shape, then this might be a good time to expand.

Recommendations for the Budding Franchisor or Franchisee

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Despite rosy prospects, a franchise is still a business risk — there’s no telling if you will recoup the money you have invested. And the losses incurred in a pandemic may take a while to recover, so the budding franchisee or franchisor would have to tread carefully. Here are some suggestions:

  • Fulfill the Community’s Needs — Going back to the upper arm of the K-shape, only consider franchises that provide essential services, with or without a medical crisis. Choose a franchise that will do well in good and bad economic times. So even if it was your dream to start the fanciest boulangerie or sell the best microscopes, you might want to give in to your second thoughts.The same goes for a franchisor — if your business is standing on the precarious area between booming and bankruptcy, it’s best to table the idea of franchising it until people (budding franchisees) have gained greater confidence in your sector.
  • Research the Competition — The people in your area have probably patronized essential businesses. Research is crucial in determining whether you can break into that territory. Moreover, you can use your competitors as a barometer to gauge how well your franchise would do.

As with all ventures, a franchise requires thorough research and consideration. The pandemic economy brings a lot of challenges, but this doesn’t mean that franchises are off the table. Given the right time, the right resources, and the right strategies, you’ll be able to make the most of any circumstance.

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