A Tale of Two Economies in 2024: Navigating Uncertainties Ahead

Franchisees could be navigating two contrasting economic forces in 2024. For those who adapt, focus on fundamentals, and manage their risks, success may be found. But for others, it could be a year of challenges and potential setbacks. One key area that could cause trouble is the restructuring of debt. Overleveraged operators already finding it tough to manage profitability may have trouble servicing debt.

For the sixth part in our series, we asked two members of the Multi-Unit Franchising Conference’s Board of Directors about their thoughts and plans for approaching business in 2024. Charles Keyser is a multi-unit franchisee of Sport Clips, Oxi Fresh Carpet Cleaning, and Ideal Image. Sam Askar is a multi-unit operator with Church’s Texas Chicken and Dunkin’ locations.

What is your vision for the economy, the franchise marketplace, and your own business in 2024?

Keyser: I believe on a macro level that the rich will continue to get richer, and the poor will continue to get poorer. That’s how our monetary system works mainly due to an asset/investment gap rather than a wage gap. Consumer debt went up almost a trillion dollars from Q2 to Q3 last year, and that's material.

However, I believe 2024 will become deflationary along with interest rates coming down, etc. That will keep consumer demand strong. I think this will be good for the franchise space. I see construction costs still a little higher due to lack of labor force, and that could affect the ask/bid of M&A. It will be interesting to see where evaluations settle in 2024.

As far as my businesses, I think 2024 could be a banner year. Recruitment efforts are working well, and we have strong leaders in place with true buy-in. Plans for expansion are in motion. The cost of capital shouldn’t be much of a factor for the deals we have in place.

Askar: Our belief is the economy will slump in 2024. Our brands are value-driven brands. Value-driven brands typically perform better in bad economic times. We must execute well in our value brands to outperform in the market.

In what ways do you think this will impact multi-unit franchisees and their business operations in the coming year? 

Keyser: I think multi-unit franchisees have a couple of key things to think about in 2024. One in particular is current debt. Many multi-unit franchisees took advantage of low interest rates coming out of the pandemic for aggressive M&A. In April of 2020, the real rate of interest (nominal rate minus inflation = real rate interest) was -.40% or close to negative half a percent. This is mind-blowing because that means you profited almost $5,000 a year for every million you borrowed—just for borrowing! 

Interest rates from the banks were low. It was a good time to borrow and operators did, leading to massive growth. Depending on the cap structure, we are entering a stage that debts are maturing and need restructuring. Margins weren’t maintained through late ‘21, ‘22, and ‘23 as projected in the beginning, which will become problematic for franchisees with large debts and low cash reserves. This is where we could see an alignment of the ask/bid in the future.

Askar: Multi-unit franchisees that are overleveraged could be in a tough situation. High costs already make it tough to manage profitability, so servicing debt may become a problem.

What are some ways multi-unit franchisees can prepare their businesses for 2024?       

Keyser: I think 2024 is going to be the year of base hits for most and swinging for the fences for a few. I think it will be a necessary year to get back to basics. Many franchisees grow quickly and need to refine some things internally. I believe 2024 will prove to be a year that the “better” and the “best” will come out well while the “poor” and even “good” operations run real risk of setbacks or worse. To prepare for 2024, I’d spend time making sure the company keeps the main thing the main thing: people, products, and service.

Askar: Reestablishing a new norm in this post-pandemic world will be important. Next year may be an opportunity to recruit better talent. The focus should be on staffing. The quality of the team and knowing who your team is could give you the opportunity to attract customers from your competition. To be successful, it will take a combination of shedding underperforming assets, strengthening your team, and consolidating your debt.