Franchising: A Recession Proof Business Model?

As time has passed the downturn has continually revealed itself to be worse than originally expected. And yet there are some writers who suggest that franchising will weather this storm better than other business models.

Plug in the terms “franchising” and “recession” into a Google search and the first four entries offer favorable commentaries on franchises as recession proof businesses. One author notes how franchising offers the opportunity for the recently unemployed to “replace routine employment with self-employment,” in fact, to create a whole new lifestyle by purchasing a franchise. Another website offers “recession proof franchises for sale.” Some one else suggests that existing franchisors can expand in a recession, reasoning that “as job losses and redundancies kick in, many workers decide not to return to the workplace as employees.”

Is this true? Could franchises be recession proof? No one really knows. Economic facts frequently do not reveal themselves clearly until long after they have actually occurred. We are now told that we have been in a recession since last January, but no one told us that at the time. There are some economic indicators that franchising companies are not being punished as severely as the general economy. Does this mean that franchises are more recession proof than other businesses? The Rosenberg Center Franchise 50 index handled the severe downturn in the third quarter 2008 significantly better than the S&P 500, dropping .4% relative to the 9% drop in the S&P.

But there are other indicators that are less sunny. Those of us in the legal community are attuned to the possibility of an uptick in lawsuits between franchisees and franchisors as either individual franchises or franchise systems fail because of economic hardship. Blogs and websites are tracking lawsuits, pending claims and troubled or troublesome franchised systems. It is premature to count those claims and measure them against prior time periods, but it stands to reason that hard times would give rise to additional claims.

Our firm is involved in the development of several franchise disputes that may form the basis for future entries. Another related topic that we will be commenting upon in future entries is the development of the low cost entry franchise, which should prove attractive in difficult economic times. In the past, first time franchisees had frequently financed acquisitions with home equity loans. As home refinancing has become more difficult, franchise opportunities that present a lower start-up cost look much more feasible. One example of this is the “man and a truck” model (or woman and a truck); one example of which is the Sir Grout home improvement system.

While no one knows if franchises are truly recession proof, they may fair better than other businesses in a recession. The partners of Einbinder Dunn & Goniea have over 20 years of experience practicing franchise law in NYC, and can help point you in the right direction if you are interested in purchasing or starting a franchise. Contact us today, and let us help you take your business to the next level.