The Wall Street Journal-20080212-On Franchising- Tips on Picking a Franchise Business That Will Weather an Economic Downturn

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On Franchising: Tips on Picking a Franchise Business That Will Weather an Economic Downturn

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Starting a business in a recession carries plenty of risks. But one way to reduce the chance of failure may be with a franchise -- particularly one that has done well in previous downturns.

There are hundreds of possibilities to choose from. If it's a business concept, someone probably has sought to make it into a franchise. For help in picking one during a financial slump, here's some advice gleaned from franchisees, franchisers and other industry sources.

-- Focus on tried-and-true name brands. They're likely to be more expensive to buy into, but the premium will be justified because of their public recognition and proven track record. And when trouble occurs -- as even in the best of systems it will -- they'll be better equipped with safety nets woven from long experience. Larger, established franchised systems also often have independent franchisee organizations, which can offer invaluable assistance and advice.

"Avoid anything that looks like a fad," says Michael Seid, co-author of "Franchising for Dummies." Hot new concepts can burn the unsuspecting investor, partly because there's scant evidence as to how well they do on economic roller-coasters.

-- Stick to core goods and services. These are the necessities of life that don't depend on customers with lots of extra disposable income -- such as haircutters, Laundromats, fast-food restaurants and educational tutoring for kids. Franchises that repair rather than replace also often do well in downturns, like auto-glass repair shops and bathtub reliners.

-- Be choosy about a site. Even established brands have poor- performing stores, and they're likely to do worse during tough times. Often, neophytes eager to become franchisees will settle for a marginal location because it's cheaper. "You pay for a good site once, and a bad site every year in terms of low volume and low profits," says Dennis Lombardi of WD Partners, a Dublin, Ohio, store-development firm.

There are several ways to find out about a franchise's "unit economics," or how well it does financially in a typical year. One is the Franchise Disclosure Document, formerly known as the Uniform Franchise Offering Circular, which franchisers issue to applicants. Another suggestion: Contact current -- and former -- franchisees. Many disclosure documents include the names of those who are no longer in a franchise system; the wise shopper should want to know why.

-- Don't pinch pennies. Expect to spend more than the previous owner. During a recession, many businesses experience a 5% to 10% falloff in sales, so a franchisee should be prepared to tap a nest egg more often than when the economy is doing well.

"You never hear of a business failing because it had too much working capital," says Reginald Heard, president of Bankers One Capital, a franchise finance firm in Danbury, Conn.

-- Have a fallback choice. Recessions often intensify competition for franchises, as corporate layoffs swell the pool of applicants seeking new jobs and income. So that franchise you want may not be available.

-- Don't assume the franchise will pay off. Even one as mighty as McDonald's Corp. admits that while it's "recession-resistant, it's not recession-proof," as the company's CEO recently said.