Pandemic Shifts Interest to Service-Based Franchises
In the past when I have written about trending franchises, I have focused on popular industries that had seen growth in consumer interest and owned a sustainable business model. As with nearly everything in 2020, the COVID-19 pandemic has changed the conversation and created an entirely new perspective on this topic.
Over the last several years, there had been a high demand for franchises that operated from a storefront location. When the coronavirus hit earlier this year and drastically impacted the economy, the effects were also felt throughout the business landscape from franchise candidates.
The biggest trend that I have seen in franchising this year has been the shift towards service-based businesses. Examples include plumbing or air conditioning repair, window washing or maid services. These are franchises that work out of homes or small offices and may eventually evolve into larger offices or warehouse spaces.
According to Franchise Insights, home services surpassed food and restaurant franchises to rank as the most popular category for aspiring franchisees in Q2 of 2020. These types of franchises, which include categories such as home improvement, painting and pest control services, claimed the top spot with 21.1 per cent of franchise inquiries in Q2 and a 31.2 per cent increase in share from Q1.
In the same set of rankings, cleaning and maintenance franchises saw the second most inquires (13.3 percent). It increased 32.5 per cent from Q1 to Q2, as many people likely saw the growing demand for those services due to the pandemic.
This trend is very similar to what we saw a little more than a decade ago. In the years prior to the Great Recession, there was a tremendous interest in investing in multi-unit storefront type businesses. Everyone took a step back when the Recession hit in 2008 and started moving toward service-based businesses that did not require a lease. For those businesses with a lease, it was often for an office and not a retail establishment.
This sentiment was primarily driven by fear and uncertainty. People decided to get into a business in which they had less exposure to an expensive lease and required a smaller investment. That trend continued for about three or four years before the economy slowly improved and people started getting back to owning storefront businesses.
Ironically, that period of time presented a great opportunity to acquire a storefront location because leases were cheaper, landlords were looking for people to rent their space and there was less demand for real estate. That is something that I have seen again this year as some people are receiving lower costs for spaces for storefront businesses. They have been able to lock in a preferential rate right now and keep that for the next 5-10 years.
Although the present situation and the past Recession made it a buyer’s market with some good opportunities for storefront locations, fear of the unknown pushed people to home or service-based businesses.
Service-based franchise systems
One benefit to this current trend is that over the last decade, I have seen a tremendous improvement in the quality and sophistication of service-based franchise systems. This includes features such as call centers, customer feedback loops, job efficiency ratios and web optimization, pay-per-click, scheduling, employee tracking, and CRM systems. It serves as a cradle-to-grave infrastructural backbone system and provides a tremendous advantage for the franchisee.
These systems are very impressive but are incredibly expensive, complicated and difficult to create. However, once they have been built, they are highly replicable and beneficial for the entire franchise system. Franchisors have a business operating system that delivers a competitive advantage over others in the marketplace. These systems give franchisees such a systemic edge that, quite frankly, ‘mom-and-pop’ stores have a very hard time competing.
A lot of service-based franchises today are part of larger systems where there may be a system with several different brands. One example is Home Franchise Concepts, which has individual franchises specializing in blind installation, indoor air quality, home storage solutions, and concrete furnishing all under its umbrella. These sophisticated operating systems allow the franchisee to predictably build a business and do it for a relatively modest cost in comparison to a storefront location.
One additional change I have seen relating to franchising this year is stricter credit requirements for SBA loans. SBA financing was relatively easy last year, but the criteria and evaluation process that banks now go through before they issue an SBA loan is tighter in 2020. They now require more working capital than had been necessary in the past.
The good news is that SBA loans are still available and the process of getting one has not changed. People go through a pre-screening process with the bank and with the organization to determine if they qualify for an SBA loan. The majority of cases can get approved and move forward. Those who do not qualify will find that out early in the process, so there won’t be any surprises at the end.
Like many other trends, it is difficult to predict a timeframe for how long these changes in franchising will last. Some people are interested in service-based franchises based on the current pandemic while others are drawn to the lower overhead costs and benefits of their comprehensive operating systems. Regardless, there are many attractive franchise opportunities in 2020 despite the current economic climate.
Rick Bisio is one of the countries most respected franchise coaches and author of the Amazon best seller, The Educated Franchise - 3rd Edition. Since becoming a franchise coach in 2002, Bisio has assisted thousands of aspiring entrepreneurs nationwide explore the dream of business ownership.