Devin Haman is the CEO and Co-Founder of Beverly Hills Rejuvenation Center, the nation’s leading medical spa franchise.
The past year has not been a prosperous time for many businesses all over the world due to Covid-19. The global pandemic has changed the dynamics of almost every industry, but its impacts have not been proportionate. Large enterprises were better able to adapt and survive through the major impacts posed by the pandemic, but the brunt of the financial fallout has landed on small- and medium-sized businesses.
The problems being faced by small-business owners during these testing times are multifaceted. The pandemic and the restrictions placed by authorities to control the spread of Covid-19 have brought many small businesses to the brink of going under, with many of them actually shutting down. To make an assessment of the pandemic’s impact on small-to-medium enterprises (SMEs), we have to look at their structure and operations.
What Are the Structures and Operations of SMEs?
Most SMEs are single-owner based, are sponsored by the owner’s personal equity and possess limited outreach in their localities. These enterprises are highly dependent on a cash-based economy and are not well placed to persist with longer-term business closures. Such businesses have limited resources, both financial and managerial, to cope with long-term disruptions to their operations. There have also been added administrative costs associated with running a business during a pandemic and pertaining restrictions that add extra pressure on already fragile operations. Further, with disruptions in global supply chain operations, it has become hard and more costly to provide products or services than it was before the pandemic. The list of problems being faced by SMEs goes on and on, but it’s important to focus on ways to allay these issues.
What Does a ‘Franchise’ Model Look Like, and How Does It Benefit SMEs?
There is no panacea to all the problems business owners face, but there is a way to provide much-needed support to dwindling businesses, especially SMEs. SMEs can really benefit from adopting a “franchise” system for running, managing and expanding their businesses. There can be many different ways to manage and run a franchise system but generally, it is defined by the International Franchise Association as “a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.”
Such a system will not only help small businesses survive but would also help them grow by expanding without incurring heavy capital expenditure.
Better Access to Funding
For small businesses, access to capital for growth, or even survival, is hard. They often do not have much leverage to get finances from financial institutions as they lack managerial expertise and a network to support them. But, by being a part of franchise network, such business owners might be able to get investment from the franchisor or from financial institutions, like banks, as banks are more open to funding established networks with greater assets.
Covid-based restrictions have severely impacted the liquidity of smaller organizations, but being part of a franchise network allows individual businesses to access pooled finances to keep their business operational.
Managerial and Operational Support
Being part of a franchise network also provides managerial and operational support. A single person managing a small business cannot often afford to take days off, and they may only possess limited experience and exposure for running a business. Under a franchise system, the expertise of different business owners is clubbed under one network and they can share insights into how to better manage their businesses. The franchisor also gets one or a number of people to manage the business since he/she has more manpower at their disposal to cover for any deficiencies.
Opportunities for Expansion
Expansion during Covid-19 seems like a fantasy, but it is possible and even practical. Purchasing power is statistically huge during a downturn. The biggest challenge facing any small business in opening or expansion is the availability of resources. Rather than waiting to accumulate enough personal resources, a business owner might look into starting a franchise system and become a franchisor themselves.
A business owner looking to move into new territory and trying to expand can seek out other entrepreneurs interested in their industry and offer them expertise, a brand and an established set-up to start their business. This way, the franchisor would increase revenue streams from the franchisee and expand the business name. On the other hand, the franchisee would be able to start a new business without the hassle of creating and establishing a brand from scratch.
A Tip for the Franchisor: Now Is a Great Time to Invest in New Business
Franchisors who have extra investment available can look into buying out small businesses they see potential in and manage daily operations through managers. As many small businesses are on the verge of liquidation due to a lack of funds, there is an opportunity for getting a good deal on potentially lucrative businesses.
The franchisor would be able to acquire a business on lesser investment than the actual value of the business, and the franchisee would be able to keep their business afloat. In a way, this can prove to be a win-win situation for both parties and will also be beneficial for the economy as a whole.
Although there are challenges in establishing and managing a franchise, if proper consideration is put into the system, it could provide the much-needed support to small and medium businesses to sail through the challenges posed by the pandemic. A very critical success factor for achieving the desired outcome is the role of institutions, both financial and public. These institutions need to divert efforts and resources toward providing support for small-business owners and investors, as they are the true backbone of any developed economy.