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Financial Challenges Facing Franchise Businesses

The current financial conditions facing franchise owners can only be described as extremely difficult.  Recent reports show that SBA loans for franchises are at a record default rates in 2008-2009.  Compared to 2007 the default rates have gone up 43% and have cost the SBA over $93 million last year.

The above statistics indicates that franchise owners are having a difficult time getting their ventures to succeed in these difficult financial times.  Everyone certainly understands the difficulty in getting a new small business to succeed and meet their financial obligations.

So, what can franchise business owners learn from the above statistics regarding recent SBA loan default rates? What are the factors that seemingly contribute toward the high default rates?  Well, a review of the statistics seems to reveal several basic factors that affect this.

First, those franchises that focused on serving the affluent customers have a more difficult time during these tough financial conditions.  As families face lower income levels, they begin to cut back on those good and services offered by franchise businesses that can be considered luxuries.  Cleaning services, laundry services and lawn services may fall into those categories.

Secondly franchises that are in an already crowded market face the prospect of stiff competition and as number of customers for that good or service fall even slightly, marginal businesses suffer immediate consequences.  As an example there are a lot of pizza restaurants both independent and franchise operators.  As families conserve cash and start to cook at home more often, they cut back on ordering pizza.  This affects all smaller and newer operators and those with lower financial capital.

Third factor that affect franchise businesses is the business model of the franchise business.  It is crucial to have a solid business model that works even in a difficult financial environment.  If the business model is marginal to begin with and depends a lot on the operator’s talent and experience, then this environment will put you to the test.  As an example opening fruit juice and cold drink stores in colder climates in winter does not make sense.

So what should a franchisor do in this environment?  It is crucial for franchisors to maintain their current base of operators and expand their base cautiously.  Nothing is more valuable to a franchisor than a demonstrable track record of success as evidenced by their customer base.  A large number of failures and defaults does not inspire confidence in a potential franchise opportunity seeker.  There are several things the franchisor can and should do.  Speak to your customer base regularly and poll them on their market situations.  Provide advise and counseling where appropriate and direct them to financial resources when needed.  When selecting new franchise owners, have a higher standard, for financial and capital requirements, so they can withstand the market forces longer.  Make sure to provide adequate training in operations so they are more successful in operating their business.

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