February 1, 2021 5 min read
I’m troubled by the staggering number of business closures and job losses brought on by COVID-19, but as a franchise industry consultant with 35 years in the franchise business, I’m also optimistic about the year ahead. Historic access to labor, real estate, and capital has created an environment extremely favorable to franchise growth, and shifting social and cultural norms will create opportunities for new concepts to expand quickly in the months to come.
All factors considered, I’m predicting 2021 to be the best year of franchise growth in at least a decade. Let’s take each market force in turn. At the end of November 2020, the unemployment rate was at 6.7 percent. That’s a slight improvement over the worst of the pandemic, but it’s still high. And when large numbers of people are looking for work, franchises have an easier time building a strong workforce. But what’s unique to this specific downturn is that in addition to low-cost laborers, it also freed up many seasoned career professionals.
Many of the people currently looking for work have management experience and technology skills, and they’re accustomed to life at the top end of the salary range. These are people who want to be in business for themselves, but at this point in their careers, they might not want to build something from scratch.
With labor what it is, it should come as no surprise that the franchise industry has experienced strong lead generation throughout the pandemic. And I expect that many more franchisees will emerge in the coming months. Those who have been waiting for a bright light at the end of the COVID tunnel, or those kept afloat by government programs, are realizing that they can no longer hold out for a return to normal. Soon they’ll begin looking for new ways to secure their future and be their own boss, and with franchising, they may find a quick path to profitability.
Now, what about getting these people qualified? In normal times, many interested parties fail to gin up the cash they need to go into business for themselves, but in the coming years, that will be less of a problem. When entrepreneurs consider opening their own franchise operations, they’ll find capital easy to come by. The stock market has been on a 10-year run, and many Americans have acquired serious wealth in the form of home equity. In September, the Federal Reserve signaled that interest rates would remain close to zero for at least the next couple of years, and the recently passed CARES Act frees up money that’s traditionally been locked away in retirement accounts. Investors can now draw up to $100,000 from their IRAs and 401(k)s without penalty.
With qualified, financed franchisees appearing in droves, the next challenge will be to find viable real estate for franchise expansion. That will also prove to be easier than ever. The sad truth is that the recent economic downturn has forced a huge number of businesses to vacate. We’re anticipating more than 100,000 closures in the restaurant industry alone, and many of those will be neighborhood joints and mom-and-pops. Franchisees that require a brick-and-mortar presence will find a plum selection of empty shells in prime locations, and the bargain prices will make it even easier to secure bank financing.
I should be careful here not to downplay the importance of sound and sober strategy. Yes, we’re on the cusp of a serious franchise boom, but the factors that doomed businesses before COVID will continue to pose challenges. Poor planning, careless management, bad locations, and limited vision can doom a company today as quickly as ever. Franchises looking to ride the growth wave will need to have strong systems in place.
To prepare now, and to begin recruiting reliable investors, franchisors should run a full evaluation on strategic planning, operations documentation, site selection, marketing, and franchisee profiling. Recruitment messaging should explain how the franchisor supported its franchisees and adapted operations during one of the most difficult periods on record, and management should be candid about shortcomings and examples of improvement within the system. It won’t be enough to generate leads. You’ll need to show franchisee success as well.
Might the boom I imagine be delayed beyond 2021? Of course. If the vaccines don’t roll out on schedule, and if the U.S. isn’t able to fully open up for business, then franchises might not be able to take advantage of the otherwise favorable conditions. In that case, opportunity for growth will still exist, but it will go to a narrower group of companies that are suited for life in lockdown, like home improvement and one-on-one services.
But in time, the growth will come. The franchises that benefit the most will be those that enter the arena with strong franchise operations and an expansion strategy that allows for aggressive action. It’s always important to have a healthy system in place to deliver positive returns for both the franchisor and the franchisee, but failing to do so now could result in missing out on a once-in-a-lifetime growth opportunity.