By Lori Karpman
From the start of 2020, Canada enjoyed a low unemployment rate. Then COVID-19 hit, and many had to stop working to take care of family, were furloughed, or laid off, and felt the pain of the stock market plummet. During and coming out of this pandemic, businesses have adopted a ‘lean and mean’ strategy to recoup their losses. One trend is to replace senior- and mid-management professionals with younger and cheaper talent. These displaced managers and professionals are seeking opportunities, and franchising may just be the answer for many of them.
While some franchises had to pause and pivot amid the crisis, sectors that provide goods or services that fulfil basic needs perform well and even grow during an economic downturn. In fact, during hard times, franchising has historically done well as the fear of job loss and financial insecurity drives people to look at self-employment.
How to choose a recession-proof industry
As is known, no industry is truly recession-proof; however, there are some sectors more resilient than others. Some factors to consider when looking for a franchise opportunity include:
Proof of concept in multiple markets
The reason people buy franchises is because the business has a track record. What one should ensure is the business model has been tested in a variety of different geographic or demographic markets. This is generally a feature of more established brands.
A product or service that is a ‘need’ versus a ‘want’
When consumers need to make cuts in their budgets, they shift from ‘wants’ to only buying ‘needs.’ So, one should consider whether the franchise sells a ‘need’ or ‘want’ product or service.
A steady and/or growing market sector
When looking for a franchise, one should consider a steady and/or growing market segment. This data can either be based on demographic or geographic markets of the industry.
Previous experience with a recession
One should look at how the business fared during the recessionary period of 2008-10. It is important to know how the recession affected the franchise’s sales and bottom-level results.
Strong unit-level economics
While gross sales or revenue of a business are important key performance indicators, the net operating income and profits are critical numbers to investigate. Some brands have high top-line sales results but poor margins, resulting in low or no profits.
Key indicators in franchise disclosure documents
The franchise disclosure document (FDD) provides valuable information about the management team and their expertise, any bankruptcies or litigation against the principals or brand, the unit turnover rate, and the number of multi-unit franchise owners. The latter is a key indicator of success as franchisees do not buy multiples of non-performing brands.