Finance

Franchise inquiries on the rise, but downturn could lead to shakeout

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Franchisors are starting to enjoy one of the few benefits of a downturn – as the unemployment rate rises, the level of inquiry from potential franchisees is beginning to grow.

Franchisors are starting to enjoy one of the few benefits of a downturn – as the unemployment rate rises, the level of inquiry from potential franchisees is beginning to grow.

Adrian McFedries, from specialist franchise consulting firm DC Strategy, says that after years of struggling to recruit new franchisees, franchise system operators are reporting increased interest from the recently redundant.

“We are starting to see the early signs of rising franchisee inquiries,” he says. “Historically it takes nine to 12 months from when the job index starts to fall. These are people looking to secure their futures.”

Steve Wright, executive director of the Franchise Council of Australia, says franchisors saw inquiries grow substantially during the recession of the early 1990s and they are already anticipating a boost throughout 2009.

He says financial services-based franchisors could particularly benefit as good-quality employees from the banking and finance sector are laid off.

“We would expect that will be feature of the 2009 picture, but we’re certainly not suggesting that everyone that finds themselves displaced is automatically a great candidate for franchising.”

Potential franchisees will find themselves spoiled for choice; since 2002, the number of franchise systems operating in Australia has jumped from 700 to just over 1000.

But McFedries says potential franchisees should be very careful before ploughing their big fat redundancy cheque into a new franchise.

His company has just completed a two-year study of every one of the 1000 franchise systems in Australia, and says that about 200 of these account for the lion’s share of growth and franchisee re-sales.

About 740 of Australia’s 1000 franchise systems are very small, with 10 or less franchisees. McFedries says many of these are in poor shape.

“Some of them shouldn’t be in business full stop, and some of them definitely shouldn’t be in franchising. The vast majority of those are not in the position to proactively drive their growth.”

He expects the downturn will highlight the inherent problems in the poor performers.

“I think Australia’s due for a bit of shakeout. This cycle will sort out the companies that make good decisions. The strong will get stronger and the weak get weaker or fall away.”

McFedries says potential franchisees must do proper due diligence on a franchise system by examining the quality of the management, talking to existing franchisees, and looking carefully at the franchisor’s product range.

Above all, potential franchisees must make sure they have enough cash.

“The working capital provision is still the great trap for many franchisees, McFedries says. “They tend to be a little unrealistic about the money they’ve got and how much they will need. You must have access to working capital, particularly in those first six to nine months.”

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