Buying a franchise will change your life in a lot of ways, but one of the most all-encompassing is that, in most cases, you will go from being someone else’s employee to being a business owner. Becoming a business owner represents more than simply a change in title. Business owners have more responsibility as well as more autonomy. Further, business owners are affected differently by economic cycles. Following are a few ways that being a business owner differs from being an employee when it comes to the overall health of the local economy.
Effects of Economic Cycles
It is normal for all economies to go through periods of growth as well as periods of decline. For employees, those periods of decline mean that there is a much higher likelihood that they will face pay cuts or even lay offs. When employees are laid off, they are likely to have a much more difficult time finding a new job during a period of economic decline. If they can find a job, there is a good chance they will take it at a lower salary than they may have accepted during better times.
Conversely, when the economy is doing well, employees may see an increase in perks, raises, and some degree of job security. What we can see from these scenarios is that economic cycles can have a dramatic impact on the life of a standard employee. Employees can go from a steady paycheck to no income in a single day, and that’s beyond frightening. When the economy is doing well, an employee may get a raise but they also may not.
Business owners can have a much different experience with economic cycles. Because downturns tend to come with a slump in consumer spending — people tend not to spend as much when they are unemployed — business owners can be faced with an under performing business. Decreased revenues mean that business owners, including franchise owners, will have to make difficult choices about operations, which might mean a round of layoffs or other cutbacks.
In the worst economic times, business owners can also face the worst case scenario of being forced to close, which is devastating whenever it happens. When times are really tough, it is not mistakes franchise owners make that cause these closure but merely economic conditions beyond their control.
In 2008, for instance, Starbucks closed 600 locations and famed cookie franchise Mrs. Fields filed for bankruptcy. Because business owners risk a lot more in opening up in the first place, they also stand to lose a lot more when things go south. When an employee loses a job, they can get another one eventually. But if a business closes, it often leaves behind debt and requires a lot more to start up again.
In good times, however, business owners can benefit in huge ways. Increased revenues from strong consumer spending means that owners can reinvest in growing their company or franchise location. For franchise owners, particularly good times may even mean purchasing a second or third franchise location to spread their expertise and improve their returns. While an employee in the same situation may only get a small salary increase, business owners can benefit in much bigger ways from economic growth.
What This Means for Prospective Franchise Owners
If you are considering buying your first franchise, it is important to look at your purchase from a long-term perspective. When you buy a franchise, you are entering into an agreement for a specific amount of time and the reality is that during that time, you are likely to experience both economic ups and downs. As you weather those fluctuations, the important question to ask is, "Would you rather be a business owner or an employee?"