Is Refranchising Working?

The Franchisor's Perspective

Franchise Zone: Why do companies refranchise? What are their goals?

Kenneth R. Costello: Typically, [with the companies] you've heard about recently, the goal is an effort to raise capital and pay off debt by franchising units and selling off company-owned operations. But there's also just a philosophical difference, where different management groups perceive they should be more company-owned or more franchised. So it may just be a re-emphasis on franchising where a prior administration was more inclined to develop through company-owned [units].

Joe Mathews: When companies refranchise, often it has to do with just getting better execution on the store level. They feel there's some sort of loss of control or disconnect on how they're operating particular units, and sometimes it's a move back to their core competency, which is franchising. If they can't control it from a strong central authority, they refranchise it and give up control to get the better execution. Generally when they refranchise, it's a turnaround strategy. Usually units are going down financially and it's an attempt to correct that.

How does refranchising benefit franchisors?

Costello: One of the benefits is that it's a way to use the entrepreneurial skills of franchisees who have financially invested in a unit vs. putting a store manager in a unit. There's a tendency for franchisees to work harder. Their capital is at risk, so they're more attentive to the operations and the profitability of the units. Certainly company-owned units that are marginally profitable can very often be run more profitably by franchisees. By refranchising, you're taking advantage of the skills and the entrepreneurial energy of franchisees. The franchisor, in the short run, raises capital by selling the unit, but then ultimately shifts the management to a franchisee, who presumably will do a better job of running it.

Mathews: Refranchising focuses the franchisor on franchising and away from operations. It keeps resources aimed at franchisees, which is the core competency of most franchisors.

Can refranchising hurt franchisees?

Costello: I suppose it could hurt franchisees if they aren't using their doing due diligence to make sure the purchase is viable and the purchase terms are fair.

I've heard that in some recent refranchising efforts, the franchisor was just interested in getting as much as they could for the units to the detriment of the buyer. But at the same time, if the buyer is reading financial statements and paying attention, you wouldn't think that would be a problem. If you're buying many, many units, you're presumably a sophisticated buyer and know what you're getting into.

Can refranchising hurt franchisors?

Mathews: It can hurt a franchisor, yes, because on the store level, you're talking about a dramatic culture shift. It's a radical change, and anytime you have that radical of a departure, people will resist it. So it does create turnover; it can create ill will. Unless the change is managed properly, it could actually blow up. It has to be managed all the way through the organization

Unless all departments are communicating and they're clear on what the objectives are, you're actually creating conflict within the franchise. Existing employees, on the store unit level, because they may have a fear of the unknown, may start quitting, which actually hurts cash flow during the transfer.

Contact Sources

Jenkens & Gilchrist LLP, (310) 442-8844, kcostello@jenkens.com

The Entrepreneur's Source, (800) 289-0086, www.franchiseexperts.com

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