Franchise Lawyer Blog

Recession Redux

We have written previously about the unusual position that the franchising model may end up occupying in this recession. We have suggested that franchising may not be affected as severely by the recession and that franchising may offer opportunities to those forced out of areas of the more conventional economy.

We posited in all of those earlier writings that only time would tell. Our recent issue of IFA Smartbrief, the informative newsletter of the International Franchising Association, contains a couple of stories that suggest that these views are beginning to gain traction, albeit with some nuances.

The May 26 issue of the IFA Smartbrief refers to an article in The Palm Beach Post that paints a guardedly optimistic picture of franchising prospects in a recessionary economy. The article states that franchising has always grown in prior recessions, based upon the flow of laid off personnel from traditional jobs who decide to start their own businesses. The author cautiously notes that this recession is different in that it comes accompanied by a severe credit crunch, which makes it difficult to finance a new business enterprise. In fact, the IFA itself has measured a 1.2% decline in franchises in 2009 so far, the first decline in recorded history. However, a 1.2% decline in an economy that has retracted as much as this one may be viewed as a positive.

The IFA Smartbrief also highlights a recent article from The Charlotte Observer in a similar vein, which makes some observations on the flight of down-sized refugees from the corporate world into entrepreneurial small business. The article makes a somewhat grimmer assessment of this trend. It notes a severe contraction in six figure jobs and observes that while the Kauffman Foundation Study finds a national increase in new businesses, much of this growth is in lower income franchises, such as child care and retail services, suggesting that people are creating jobs out of necessity, rather than finding great business opportunities.

We recommend you to the Smartbrief (contact for actual hard news about how franchises and franchising is faring in this economy. With respect to our earlier writings, there does appear to be a shift in emphasis towards franchising, but entry may be harder than forecast because of the credit crunch. Moreover, the desperation of unemployment may be driving people to lower cost to entry and lower income franchising opportunities.

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