Summary
Downturns in the economy are when strong franchise systems excel. They take advantage of the fact that there are so many people looking for their next vocation. Good systems use this time to reevaluate the strength of their franchisees and the viability of each of their units. They make their strong franchise stronger and their weak franchisee they help with exit strategies. Some units may go away because of age, change in demographics or poor operations for too long. But they never loose units that make sense to keep open. The IFA article states some interesting numbers but what is normal. 10% of all units in healthy systems are in the mist of changes at any given time. Failure rates are watched by the SBA by category, region and by brand. When the rate exceeds 3% in any of those groups it sets off warnings, over 5% and a brand could loose the ability to finance projects with SBA backed loans. The first department to go in bad times is development but they are the ones you need now.
Analysis
We have been here before, just not quite this bad. I have seen over 25 years in development for several franchise organizations. Things will come out the same most likely, the strong will get stronger, and the weak will struggle or just go away. So why is this so different. The availability of cash to keep afloat, develop or improve. Strong systems were prepared with plans for those what ifs. They are creative and think out of the box. The have set themselves up with multiple sources of financing in advance. They knew that the development side of franchising does well in a downturn if they are prepared. They have meet with their funding sources and worked out contingency plans so they minimize closed units and bad loans for their sources. They have great relations with the landlords across the country and are considered prime tenants. Yes they will close units, but they will be units that probably would have gone away any way. Too old, out dated, not properly maintained, and or poorly run for too long. They will do their best not to loose any great locations. The will show positive growth even in categories that are not doing well. In the article they mentioned numbers that aren’t that out of line from normal years. It’s just that they were opening so many new units you loose the fact that units were still closing. Yes the over all results this year will be the lose of gross dollars and jobs. Some markets and categories will come back faster than others but overall the economy will see a positive turn later this year and solid growth next year. The real estate and construction industries got hurt the worst because they benefited so greatly in the good times. The companies with strong management will come out just fine. The ones that were making killings in spit of themselves will go away. Those of you that were prepared will continue to grow even in these hard times. Those of you that weren’t make notes don’t let it happen to you again, because there will be a next time there always is.
