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Which small businesses have a good chance of surviving the pandemic?

As early as in April this year, the Federation of Small Businesses (Britain’s largest employers’ group) conducted a survey of 5000 companies to see how the present pandemic and subsequent economic crisis would affect small businesses. It revealed that at the time of the survey, one in three companies had temporarily shut down during the lock down and it was expected that they would never reopen. Furthermore, the survey found that of 40% of the companies which had been forced to close at the start of the outbreak of the virus 35% were not sure whether they would reopen.

If this proves to be correct the government will be faced with a major challenge as these businesses are weaned off the government’s emergency measures of support. The survey further revealed that one in three small businesses had already been contemplating making redundancies.

Furthermore, it seems that 25% of small businesses have failed to make or are faced with severe difficulties in making repayments on loans and or rent for their business premises as a result of the economic effects of the pandemic. About 35% of these businesses, we are told, have also either stopped or reduced their plans to develop their businesses or products.

If small businesses are to be burdened with arrears of rent or mortgage payments and a slow take up of customer orders, it is difficult to see how they can survive without continued support of some kind from the government into the medium-term. Small businesses have always been vulnerable to adverse changes in the economic climate. Like farmers, they provide an invaluable service not only to the communities within which they operate but also collectively to the commercial well-being of the nation. Farmers are at the mercy not only of the weather but also of unexpected diseases, be it foot and mouth, BSE, blight, etc. More often than not (though many farmers may claim not often enough), farmers have received support from the government to see them through their crises, but not small businesses, although I am mindful of various initiatives in the past such as the small business loan guarantee scheme which have come into play at various times.

What distinguishes a farming business from a small business is that the former tends to be run efficiently, whereas the latter not necessarily so, and the tax payer can object, with some justification, at governments throwing good money after bad.

If small businesses are generally thought to be inefficient in terms of their financial management  (how often has one experienced having a builder visit premises to assess the cost of doing a piece of work to enable him to quote but is never heard of again?), what are their chances of survival and is there an affordable user friendly good business management system which would give a small business a good chance of weathering the storm?  Business format franchising is said to be such a system.

Franchises are essentially small businesses which operate under the umbrella of a large business. The nature of a franchise is such that a small business owner can benefit from the use of the brand, know-how, marketing, buying power and training of a much larger organisation whose business concept has been tested and proven to be successful, and which licenses its business system out to small business owners.

Small businesses operating within franchised networks are likely to have a better chance not only of surviving but also of emerging ready to take up the slack when the time comes.

Operating a small business can be very lonely. Problems may not be assuaged by talking to competitors or seeking their advice on how to solve problems encountered. Those operating franchised businesses have a clear advantage over their competitors in this respect. Being a part of a non-competing network (it is rare for franchisees to be competing with each other) franchisees can discuss their problems freely with other members of the same network and indeed be offered solutions to similar problems encountered by them previously.

A distinction needs to be made here between a business which is a part of a franchise network and a business which is a member of a voluntary chain like Londis or Spa. In the latter case, membership gives access to a buying group whose aim is to benefit from economies of scale by baulk buying. Such businesses are however not as rigidly controlled as a franchise and although they project a common brand and to some limited extent marketing image, the businesses themselves are pretty much left to their own devices so far as the management of their retail operation (mainly product sales) is concerned. Franchised business, however, are systems based and their modus operandi tightly controlled.

Admittedly, nothing like the present crisis has been witnessed before both in its severity and its longevity. They have, in the past, been crisis such as the BSE and the tomato crop failure in the 80s but in those cases the adverse effect was industry sector specific. In the former case, fast food hamburger outlets were severely affected and, in the latter, pizza makers for whom tomato paste forms the basic ingredient of the product.

 In the case of the tomato shortage, franchisors hastened to secure supplies for their franchisees from overseas producers far more distant from their usual suppliers, some obtaining supplies from as far afield as the Middle and the Far East. In the case of BSE, a similar thing happened and small business outlets trading under their respective franchises benefitted from the quick action of their franchisors. In both cases those outlets which were franchised businesses pulled through but some independent small business having no access to such support, did not.

That is not to say that the pundits who espouse the unassailable successes of franchise businesses are right.

As far back as 1977, Professor John Stanworth, David Purdy and Stuart Price compared franchise growth and failure rates in the United States with those of the United kingdom and questioned the reality of the rhetoric espousing the success of franchising generally. The Stanworth survey served to highlight a crucial aspect of business format franchising as it relates to the growth (and presumably therefore the success) of franchised businesses.

Those involved in franchising have tended to promote the notion that “franchisees are five times more likely to succeed than independent start-ups“. Such sweeping statements need to be treated with caution.

The truth of the matter is that franchising does not solve cash flow problems, turn losses into profits, beat a recession, buck market trends or resolve problems of undercapitalisation.

Ultimately the survival of a franchised business in present circumstances will in large part depend on the quality of the franchisor company. Apart from the formula, and a proven system, the quality of the management of the franchisor is crucial to the success or failure of any member of its franchise network. At the end of the day franchising is about management. Badly managed franchise companies don’t last long and nor do their franchisees.

Franchisor companies also are facing difficulties during the present crisis and many are less able to support their franchisees than heretofore. They are not going to be able to help their franchisees with arrears of rent or mortgage payments but they may well be able to negotiate more favourable terms of supply and cut some of their franchisees some slack when it comes to paying royalties and other fees and terms of trade for supplying them with products and services.

And what if the franchising company goes bust? Will it drag the members of its network into the mire with it? Will its franchisees on whom they have relied also fail, or finding themselves cut adrift will they manage to continue under their own steam?

Time will tell. But those in the service industry are more likely to fare better than those in the retail sector selling products. Even if there is no franchisor in the background any longer, they will be able to continue plying their trade but now without the additional burden of having to make royalty payments and other contributions levied for advertising marketing promotions generally for the benefit of their network as a whole. After all, once a franchisor company has shown its franchisee how to clean carpets and if that franchising company disappears the franchisee will not be deprived of that knowledge nor of its customer base which tends to be local. To the extent that the franchisor has been supplying consumables (cleaning material chemicals etc) its franchisees will now have to source them for themselves or by forming a buying group to negotiate terms with their former suppliers.

At the end of the day the success or failure of small businesses will depend on the quality of their financial management. The important difference between an independent small business and a former franchised business is that the latter, because of the financial training and discipline imposed by its franchisor over the years, will be in much better shape to survive the present crises and emerge ready to join the fray.

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