Franchise development needs reinvention to reflect a new normal
Illustration by Jonathan Hankin
Franchising has never faced a threat like COVID-19. And yet, this recession, like others before it, will drive new buyers. Some displaced workers will find business ownership appealing. Others buyers seek supplemental income. Don’t stop your franchise development efforts. Engage and maintain forward momentum. It is also critical to supporting re-sales.
Our new normal is taking shape. Your recruiting process and content will likely need reinvention.
A different, smaller competitive field
Some franchise systems will, regrettably, not survive a prolonged shutdown. Many categories were already overcrowded. The strongest concepts will take market share and the field will shrink.
Don’t assume you still know your competitors. Some systems may pivot out of franchising altogether or pursue other models such as direct-to-consumer. The shutdown forced fast adoption of technology and new service methods. Competitor recruiting messages and revenue models may have changed. Reassess the landscape and your brand’s position on the spectrum.
Right now, every business is learning new things about their customers, franchisees and employees they didn’t know before. How has your labor model changed?
Customer demand? Price sensitivity? Perceived value? Expectations? Have real estate requirements changed? What new growth engines have been created? These learnings should be reflected in updated strategic plans, sales content, discovery day and candidate Q&A.
Can a franchise be ‘recession resilient?’
Some brands and their sales agents overtly say or imply that they (or their category) are “recession proof’” or “recession resistant.” A Google search of “recession proof franchises” yields thousands of links. Regulators may take a dim view of these claims going forward, unless backed by verifiable data. “Essential” only means “allowed to operate;” this is easily verified via state websites. “Resilient,” “resistant” or “recession proof” implies an outcome—and that smacks of an earning claim.
Speak to counsel and review all of your franchise marketing materials.
Another potential problem area is financial performance representations. Current look-back system results reported in FPRs are from a snapshot in time—a time before the COVID-19 market dislocation. Can buyers rely on 2019 FPRs to get a sense of how business could perform in 2021 and beyond? What 2020 results can be shared, and when? Disclaimer language is strictly limited in FPRs.
Offices that handle franchise registrations in states such as California and Maryland recently expressed concern during an International Franchise Association webinar, regarding the potential for outdated information in financial disclosure documents to be used to sell franchises. Work with counsel to determine the appropriate language for your FPR and supplemental materials. For many candidates, 2019 data is still valuable information and they will want to see it.
What is the reliability of FPR data and what constitutes “material” changes to the business requiring re-disclosure? This will partly depend on the length of the initial shutdown, or whether we open, and then have rolling shutdowns again due to a resurgence of COVID-19 cases. Ensure that your franchise development team, brokers and agents and your supporting documentation are very cautious right now about discussing the fast-changing 2020 environment. We will see increased regulatory and examiner attention on FPRs because of this data disconnect. Disclosure states will lead the way, and may require interim updates if there is evidence of materiality.
Franchisors must drive demand
Massive investment will be needed to reconnect, drive demand and help customers feel comfortable engaging again. Some categories will fare better than others. It’s too early to know whether consumers will have more frugal mindsets. The return of customer demand may be unpredictable, spotty, slow or permanently changed.
No matter what happens, franchisors must do most of the heavy lifting to reignite customer demand. Franchisees will be swamped trying to retrain their teams and get open. They likely won’t have the bandwidth or resources to kick off a massive local marketing effort at the same time. Both new candidates and existing franchisees are likely to have this expectation.
Credit will tighten
Rates are low, so there is a low spread but higher risk. Millions of small businesses will permanently close. Lenders will re-evaluate franchise brands as they rationalize their portfolios and move away from less productive loans and concepts. Requirements are likely to increase, such as for higher down payments, liquidity and credit scores.
Lenders are currently overwhelmed with refinancing and emergency relief requests. Lean on your relationships with lenders to get both your current franchisees and new candidates the attention they need. Provide ongoing access to credit counseling and capital planning services so your owners can refinance if needed into lower interest rates so they can be prepared to grow again.
Franchise buyers forever changed
The biggest post-COVID-19 change may be to buyers themselves. They may emerge with new objectives, feelings about risk, contract language and fees, or altered views about the desirability of entire franchise categories. Buyer expectations around technology, training and franchisor support may also change, putting more pressure especially on emerging concepts. Any weaknesses in your development process will reveal gaping holes now.
Finally, expect a buyer flight to quality. Prior to the crisis, 80 percent of net unit growth already occurred within the top 26 percent of brands, according to Franchise Grade. Buyers will gravitate to proven, long-term successful brands. This crisis will reveal new winners and some glaring weaknesses, impacting buyer perceptions from now on.
Alicia Miller is a principal at Franchise Performance Group. Her Development Savvy column covers smart ways to market and grow a franchise. Reach her at email@example.com.