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Essential components to finding the ideal franchise opportunity

Today's retailers are faced with difficult choices in meeting the increasingly challenging and uncompromising demands of today's Millennials as well as the pressing needs of aging Baby Boomers.
Today’s retailers are faced with difficult choices in meeting the increasingly challenging and uncompromising demands of today’s Millennials as well as the pressing needs of aging Baby Boomers.

By Grant Bullington

Editor’s note: In this article, the author will focus on some of the realities he has observed in the Canadian industry, and how these trends are impacting the franchising landscape now and will continue to do so in the foreseeable future.

In a normal year, one might read about how category ‘X’ continues to increase its market share with faster year-over-year growth, or how home-based franchises are increasing in popularity.

The reality is there is nearly unlimited data to pour over in an attempt to spot trends. But what is taking place in 2020 has seriously upset the statistics apple cart. Trends that would otherwise be expected to continue saw their trend lines go over a cliff, and new movement is popping up unexpectedly. But are these blips, short-lived occurrences, or budding trends?

Early 2020 brought some major changes to businesses and franchising. A bit of time has passed since travel was restricted, retailers and restaurants were shuttered, and Canadians found themselves in virtual lockdown. But it has only been a small window of time in the bigger spectrum.
Things are far from normal, and people have widely varying opinions on when people will get back there and what the ‘new normal’ will look like.

Past trends and early search patterns

Franchising historically slows down briefly leading into and during major economic crises, only to emerge with steady growth over the short to medium term (12 months to five years). As unprecedented as COVID-19 is, there are early indicators that show franchising is looking to do the same again in the coming months and years. That said, the rebound will not be universal among all areas of franchising.

When one looks at internet search data related to franchising and self-employment, it comes as no surprise the pandemic caused significant changes to the number of searches, as well as what people were searching for. There was a substantial drop in the number of searches in March for general terms like ‘franchise opportunities’ and brand-specific searches. But by April, the aggregate franchise search was on the rise and, by May, it was back to where the figures were pre-COVID and three to four per cent higher than prevailing 2019 numbers.

Changes in search patterns only tell part of the story: what franchises people search for, not what they invest in. The author’s company’s digital marketing partner pointed out brand-specific pizza searches (e.g. XYZ Pizza Co.) jumped more than 300 per cent in April, only to return to normal numbers by June. Only time will tell, but it is highly unlikely pizza franchises will report a 300 per cent increase in franchise sales in Q4. As of June, pizza, home cleaning, and home services were the top three in search categories. All in, it did not take long for internet search activity to pick up where things left off and settle back to normal levels. (On a side note, there was more than a 700 per cent increase in searches related to self-employment options in March. Were they all going to start businesses? Perhaps not, but clearly the notion exists in a lot of Canadian minds).

Clients are gravitating toward businesses with a lower total investment as a percentage of personal net worth.
Clients are gravitating toward businesses with a lower total investment as a percentage of personal net worth.

Client activity, research criteria, and process

Unsurprisingly, there was a sharp and significant decline in the author’s client activity this year. Some pumped the brakes waiting to see how things unfolded. Others simply slammed the brakes and have not done anything since. Also (as expected), new clients were somewhat slow to emerge until May/June. This is roughly around the time when many regained some confidence in either starting to look for a franchise or picking up where they left off three months earlier. Since then, the author’s client volume has rebounded to about 80 per cent of where it would be in a normal year. It appears the reduction is in less-committed or engaged individuals (a.k.a. tire-kickers). Regardless, everyone is on high alert and taking a cautious approach.

The research process can be completed quicker, but people are taking longer. One of the first changes franchisors made was to substitute the in-person discovery days with virtual ones. This removed what can sometimes be a two- to four-week part of the process. And yet, people are taking longer to research. Although somewhat anecdotal, the author’s clients’ average research timelines have increased by 20 per cent, or three weeks, since April. Some of the reasons include:

More extensive validation

Clients are spending more time (one to two additional weeks at a minimum, a 25 to 50 per cent increase) in validation and attribute it to these reasons:

  1. More questions to ask: In addition to the standard volume of questions asked and information gathered, there is a new set of additional conversations and questions to understand how this crisis has impacted the businesses being investigated. “What about COVID-19?,” is not an optional five-minute conversation.
  2. Speaking with more franchisees: It seems people simply want to talk to more franchise owners when evaluating their options. There is comfort in increasing the sample size.
  3. Some franchisees are tough to reach: This is especially true for strong operators in categories unfazed by or boosted as a result of the crisis. It takes more attempts and a longer time to finally connect with some franchisees—especially those who use words like ‘frantic,’ ‘slammed,’ and ‘overwhelmed’ to describe their current state of affairs.

Financial criteria

When one looks at internet search data related to franchising and self-employment, it comes as no surprise the pandemic caused significant changes to the number of searches, as well as what people were searching for.
When one looks at internet search data related to franchising and self-employment, it comes as no surprise the pandemic caused significant changes to the number of searches, as well as what people were searching for.

Clients are gravitating toward businesses with a lower total investment as a percentage of personal net worth. Canadians are generally more conservative compared to the U.S. as they are not interested in being overly ambitious or rash when investing in a franchise with aggressive borrowing exceeding half or more of their net worth. Before now, when Canadians looked to borrow to make sizeable franchise investments, lenders politely suppressed these ambitions. Now, banks are upping their risk-aversion game and clipping would-be investors’ wings. More than a few clients did a complete rework of their game-plan. The bigger investment options were out, and the more affordable ones were in.

Lower operating and overhead costs

Now, more than ever, clients are leaning toward businesses that have both lower overhead and more manageable expenses. There is greater appeal to owning a business that does not require considerable capital to start and can instead scale up (and down, if required) by adjusting the resources deployed on an as-needed basis. Residential services or business services are just two examples of already popular categories rapidly gaining traction.

Changes in the lending landscape

It is safe to say Canadian banks are conservative lenders. And, in the interest of avoiding significant loan losses down the road, they are understandably even more prudent and reserved in their current lending practices. There are some noticeable changes from the past few months that are expected to persist in the short to medium term.

  • There are some categories banks are not interested in financing.
  • It takes longer and requires more work to get the final decision. Start sooner and be patiently proactive.
  • If one can get financing, banks will want to see them put more of their own money into the business. This amount can be as much as 35 to 45 per cent of the total investment in categories that, less than a year ago, would have required 25 to 30 per cent of one’s investment.
  • Banks will not lend as much based on one’s personal net worth. Simply put, one cannot borrow as much now as they could have earlier.
  • One can be expected to create financial forecasts for new, dire scenarios. In addition to the usual worst-case/best-case/middle-of-the-road scenarios, lenders will want to see forecasts that factor outcomes of a repeat of mandated closures or a second wave of pandemic outbreaks. In this case, the author recommends completing this ‘stress-test’ exercise, even if one is self-funded.

Remember to research

This is not a new trend. One should always approach due diligence in a directed, data-driven, and disciplined manner. And, given how everything has been impacted in 2020, it should become one’s mantra. There is not a lot of margin for error, and relying on guesswork or simply trusting one’s gut can lead to disastrous outcomes.

The smartest way to get on and stay on the path to making a safe and sensible investment decision is to dismiss assumptions and conclusions—whether they have persisted for years or have been hastily formed in recent months. There is a chance one’s 2019 speculations are no longer relevant (and may be downright dangerous to rely on now). One’s best options may be different than what they think—they may not be obvious, or right at the surface, and may even take some extra effort to uncover, but they do exist. There are franchises that not only sidestepped trouble, but are ‘business as usual,’ or even thriving in these times.

Now, more than ever, having an open mind, expanding one’s search horizon, and having the willingness to truly commit to the process are key to finding the ideal franchise opportunity.

Grant Bullington is a Vancouver-based franchising consultant with FranNet Western Canada, helping prospective franchisee clients determine their ideal type of business, providing optimal matches, and assisting their research at no cost. For more information, visit www.frannet.com.

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