According to the Chancellor of the Exchequer Alistair Darling we have "good reasons to be confident" about the national economic outlook. However many commentators are suggesting the UK could slip into recession this year. In fact a recent survey conducted by personal finance website Fool.co.uk revealed that one in six adults believes we are already in one.

By the time this edition of The Franchise Magazine hits the news stands the Chancellor will have announced the Budget, but with many experts calling for few measures and a 'wait and see' approach, there may be little succour for the small business community. So if you're considering starting your own business by investing in a franchise, is 2008 the right time to take the plunge?

OBTAINING CAPITAL INVESTMENT FUNDING
With the credit crunch affecting the availability of loans, franchise buyers may expect to struggle to put together the capital requirement for buying a franchise and the associated start-up costs. However, Simon Clarke FCCA, Finance & Technical Director at franchise TaxAssist Accountants, offers a contrasting opinion: "Bank managers and bank lending teams still need to lend money as that is what they are in business to do. They will not want to stop business all together. The irony is that this will probably mean that franchising is looked upon more favourably. This is because franchising in general is seen as a much safer bet for banks to lend to for start-up businesses, as the risk of failure is statistically much lower."

This view that loan applicants securing funding for a franchise will line up at the front of the queue ahead of other business start-ups is shared by HCBC Head of Franchising Catherine Hayes, who confirms: "HSBC is the most highly capitalised bank in the world, meaning that credit is available for sound business propositions. Franchisees are considered to offer a lower risk than other conventional start-up businesses due to the support available from the franchisor and the rest of the network."

With the Bank of England seeking to stimulate the flagging economy by gradually dropping the interest rate, not only is capital available for borrowing to invest in a franchise, it is also cheaper too. "In theory, of course, lower interest rates mean that lending is more affordable," Catherine continues. "A lot will depend on business performance - and as always, a well thought-out and structured business plan will help franchisees to demonstrate that their business can afford to repay any lending."

WINNING BUSINESS IN AN ECONOMIC SLOWDOWN
While franchising is most visible on the high street in the retail and food service sectors, opportunities are available in a wide variety of industries. The performance of concepts providing essential services to businesses such as commercial cleaning, accountancy, fleet hire and cost reduction consultancy is not tied to consumer spending, which means these businesses enjoy a certain level of insulation from ups and downs in the economy. Similarly, emergency service concepts such as trade franchises (lock smiths, electricians, plumbers, etc.) will have customers however the economy is performing.

"Although not recession-proof, the wide spectrum of sectors covered by franchising means that the UK franchise industry is likely to fare better than conventional SMEs (small and medium sized enterprises) in difficult times," comments Catherine. "The failure rate for franchises is much lower than for stand alone start-ups. This is predominantly due to the support of the franchisor and other franchisees in the network, who can help new franchisees avoid the pitfalls of starting up a business. In addition to the low number of failures, 93 per cent of franchisees are running a profitable business."

GROWTH PROSPECTS FOR FRANCHISE NETWORKS
Franchisees who are part of a growing network of outlets or offices benefit from their franchisor's increased national profile and ability to secure network-wide accounts from blue chip clients on their behalf, as well as referral business from their fellow franchisees. A common theory about franchising holds that a recession drives growth in the franchise industry, due to an increase in the number of potential franchise buyers caused by higher unemployment and redundancies. So could we be about to see a boom time for franchise recruitment?

"This has been proved to be correct in the past and is likely to be so again," believes Simon. "One major factor that prevents people from joining franchise networks at present is that leap of faith into the relative unknown of self-employment, compared to the relative comfort and safety of a well paid, secure job. However, take away that safety net and the incentive is greater to start self- employment. By nature these people are more cautious and careful, and likely to see franchising as a good toe in the water and a helping hand to their start-up dreams."

If you are daunted by the credit crunch, but still interested in investing in a franchise, a period of economic instability is an excellent time to analyse the performance of franchisees. After all, if your selected franchise is outperforming the economy when it is struggling, you can be confident it is a business that is not reliant on consumer trends and also look forward to brighter growth prospects when the economy enters an upswing.

Also, the pessimism of some commentators may be unfounded, suggests Catherine: "Talk of recession and redundancies is probably premature - in the three months to November last year employment rose by another 175,000 to the highest level in British history, while December's 6,400 fall in the claimant count was the 15th consecutive monthly fall and took the jobless total down to levels last seen in the early 1970s. When the Office for National Statistics published its preliminary figure for GDP, it seems the UK economy had grown by 0.6 per cent in the fourth quarter, pretty much on-trend and the 62nd consecutive quarter of positive growth. So, if the UK is going into a period of slower growth, it is starting from a relatively strong position."

Text: Stuart Anderson