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OPINIONFinancing

The coronavirus shutdown isn’t stopping some from selling franchises

Despite mass closures, some franchisors view the shutdown as an opportunity to find operators, even if it means giving strange history lessons, says RB’s The Bottom Line.
Photograph: Shutterstock

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It’s not every day that an announcement about franchise sales features a lesson on the impact of the plague on medieval European feudalism.  

But that’s exactly what Paris Baguette did Wednesday. The 82-unit bakery-cafe franchise based in New York announced that it was seeking multiunit owners to “leverage the unique short-term advantages provided in the franchise industry.”

In so doing, the release gave a bit of a history lesson about the economic change that has come in the aftermath of pandemics and recessions. Thus, the plague.

“Entrepreneur Magazine recently reminded us of such historic events as the Black Death in the 1300s, which was followed by the end of the feudal system in Europe, which changed the face of employment.”

Generally, it’s a good idea not to associate your franchise in any way with a disease that once wiped out much of the human population, but these aren’t normal times.

The coronavirus shutdown is not stopping franchise sales. As the dust clears, in fact, expect franchisors to get increasingly aggressive, tapping into workers’ fears of layoffs to get people to open up units in burgeoning restaurant brands.

A survey last month by franchise software firm FranConnect found that nearly two-thirds of franchisors continued to sell franchises even as the pandemic hit.

To be sure, small brands with few locations largely halted them, as did most full-service restaurants: Three-quarters of such franchises said they’d stopped franchise sales. In the restaurant industry, full-service concepts are expected to have the most difficulty surviving and emerging from the shutdown.

While it might seem like the timing is off for such sales, in the franchising world, it actually makes some sense.

All of a sudden, millions of Americans are without a job. A certain percentage of those Americans have some money in the bank or access to capital, and they might be annoyed at being laid off.

That’s absolute red meat to franchise sales representatives who love nothing more than to play to the idea that people can “be their own boss.”

And then, consider this: Likely several million restaurant employees were among that group. There are bound to be a few of those who have some money in the bank and are, again, frustrated at getting laid off. So there are likely a number of potential restaurant franchisees suddenly on the market for something to do.

As the Paris Baguette release pointed out, the last recession did lead to a rise in entrepreneurship as laid-off workers created their own companies. Many franchises got their start or took off during this era, including much of what we know as the better-burger segment. Smashburger and Mooyah, for instance, both were founded in 2007 and started selling franchises in the midst of the recession.

So, too, were many frozen yogurt shops, which expanded rapidly over the subsequent years, only to collapse just as fast because there were too many of them and they all looked alike.

Indeed, franchise sales comes with considerable risk. The businesses themselves are no safer than simply starting your own company. While the brand itself provides support to the operator, franchisees face restrictions on their businesses, and royalty and other payments often eat into profits.

The franchise sales process can also be misleading—and in rare cases, outright fraudulent, as we saw with Burgerim—and there are few penalties for selling a bad franchise to an investor.

The bigger issue, both for franchise sales executives and franchise buyers, is what environment they’re investing in. While the restaurant industry is hardly going away, financing might not exactly rush back into the sector.

The operating environment will likely look a lot different two or four years from now. And the coronavirus itself appears likely to be a problem for at least a couple of years. Any prospective buyer, and seller, needs to take that into account.

This is uncharted territory. There were no franchises during the plague, after all.

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