“…franchising as a business model has shown itself to be pretty resilient through times of past economic crisis…” (Forbes)
A recession is characterized by a significant slowdown in economic activity, often resulting in declining profits for businesses. However, a recession shouldn’t necessarily stop you from pursuing franchise ownership. Not only do franchises offer more stability than starting your own business from scratch, there are plenty of recession-proof franchises to consider.
Furthermore, if you’re planning to buy a franchise, there are steps you can take to prepare your business for a potential recession.
Step 1: Assess Your Financial Health
Buying a business is a significant investment, so it’s crucial to ensure your own financial health is stable. This is especially true in uncertain economic times. You can do the following to evaluate your financial position and the health of the business you’re interested in:
- Analyze Cash Flow – You’ll want to assess how a recession might impact the business’s cash flow. Not only should you have enough cash accessible to manage purchasing a business, but you’ll need to account for potential cash flow fluctuations.
- Evaluate Expenses – Carefully assess the business’s operating costs and identify any areas that might be an issue down the road. Item 19 of the Franchise Disclosure Document (FDD) might provide some insights here as well as speaking with existing franchise owners.
- Build a Cash Reserve – After you evaluate the business’s cash flow, you’ll want to assess whether or not you have the resources to sustain the business during negative periods. Building a cash reserve ahead of time can provide the financial safety net you need.
Step 2: Strengthen Your Customer Relationships
When buying a franchise, a key factor in your decision should be the strength of its customer base. Being able to depend on loyal and engaged customers during tough economic times will allow you to maintain a steady revenue. After you’ve purchased the franchise you should focus on:
- Prioritizing Customer Retention – This includes evaluating the current customer base and making sure you retain high-value customers.
- Enhancing Customer Communication – This requires being transparent and earning your customers’ trust. You can leverage various communication channels such as email, social media, and direct messaging platforms in order to gather feedback and adapt accordingly.
Step 3: Diversify Revenue Streams
Having diverse revenue streams is always a good idea, but it’s particularly crucial in a challenging economic environment. Depending solely on one source of income is risky so it’s important to expand the franchise’s revenue potential. Consider doing the following:
- Identify New Opportunities – Fortunately, a franchise comes with a well-established brand, which you can leverage to introduce additional complementary products or services. You can also appeal to a broader audience by offering premium or budget-friendly versions of core products.
- Focus on Recession-Resilient Offerings – This includes providing products and/or services that have a steady demand while also offering cost-conscious alternatives.
- Explore Digital Revenue Streams – Online classes, digital consultations, and e-commerce sales are all ways you can diversify your income potential.
Step 4: Optimize Operational Efficiency
“The greater the operational efficiency, the more profitable a firm or investment is. This is because the entity is able to generate greater income or returns for the same or lower cost than an alternative” (Investopedia).
One of the benefits of purchasing a franchise is that they often come with a proven operating process. Ensuring that your business has streamlined operations that reduce waste and maximize profits is key to success. Here are a couple of tips:
- Leverage Technology – There are various automation and digital tools that will cut costs and improve productivity.
- Adapt to Remote or Hybrid Work – Depending on the business, having a flexible work model could reduce overhead costs and improve operational efficiency.
Step 5: Evaluate Your Business Plan and Strategy
You should have a thorough business plan that outlines the goals, strategies, and operational plans of your business. The business plan will prepare you for what lies ahead, and it should include a focus on minimizing your debt levels. To do this, you can:
- Refinance or pay down high-interest debt
- Avoid taking on new unnecessary debt
The less debt your business has, the better off you’ll be during a recession.
Step 6: Focus on Employee Well-being
A motivated and engaged workforce is a key to a franchise’s success. It’s even more crucial during a recession as satisfied employees lead to productivity, customer satisfaction, and operational efficiency. If you’re thinking about buying a franchise, consider how the existing workforce is managed and plan to do the following as a franchise owner:
- Maintain Employee Engagement – Build trust with your employees by providing regular updates and being transparent about operational or management changes.
- Upskill & Cross-Train Staff – This includes training employees to handle multiple roles to increase efficiency and reduce the need for additional staff. It’s also important to invest in high-potential employees through leadership development and specialized training in order to increase retention and overall performance.
- Prepare for Potential Downsizing – Businesses often face tough decisions like layoffs or reduced hours during a recession. Make sure there is a well-thought-out plan that prioritizes the employees. This could include: severance packages, outplacement support, or assistance with finding other job opportunities. Alternative approaches to downsizing that would allow you to retain key staff members include: temporary furloughs, job-sharing arrangements, or performance-based incentives.
- Create a Supportive Work Environment – Set the foundation for a motivated and resilient workforce by rewarding employees who go above and beyond. A loyal staff can sustain your business during a recession and produce long-term success.
Looking to Buy a Franchise During Uncertain Times?
Despite today’s uncertain economy, franchising is still on the rise and looking good throughout the rest of 2024. If you’re interested in buying a franchise, a FranNet franchise consultant can help you explore your options. We’ll walk you through the process from start to finish at no cost to you. Schedule your free consultation today to get started!