You're a franchisee with 10 units and would like to add more
but just don't have the resources. Then your franchisor offers
to sell you a dozen company-owned stores for what it would cost to
open a few brand-new locations.
What do you do? After all, this is the chance of a
lifetime-you'd be a fool to pass it up, right? Not so fast. As
franchisees with Taco Bell (more than 1,000 of whom had restaurants
repurchased by Taco Bell's parent company, Tricon Global
Restaurants Inc., or were granted loans to minimize losses) and
several other high-profile systems found out, there's more to
refranchising than meets the eye.
According to Dan Boroian, chair of Olympia Fields,
Illinois-based franchise consulting firm Francorp, franchisors
implement refranchising plans for many reasons. "[Tricon]
refranchised because it needed capital," he says. "From
their point of view, it makes sense, because they can raise money
by selling off company units while also freeing up capital and,
more particularly, the responsibility of day-to-day management [of
the units]."
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It makes sense for franchisees, too, except when the stores are
underperforming. "It doesn't work if the franchisor is
just selling off units that are losing money to get out from under
the negative cash flow or to get rid of units which can't be
salvaged by a franchisee," Boroian says.
But for David Lobel, managing partner with New York City-based
Sentinel Capital Partners, an underperforming unit isn't always
a red flag. His company buys businesses, improves them and sells
them after turning them around. "We would pay a price for the
business based on the way it was operating at the time," he
says, "but we knew that after three to five years, we could
significantly improve [the business's] profitability."
Even though the stores Lobel is interested in would probably
make a typical franchisee nervous, he does offer advice that makes
sense in all refranchising situations: Do your research. "I
went in, did the homework, kicked the tires real hard and knew what
I was getting," he says. "If I wasn't comfortable
with the risk I was taking, I wouldn't have done the
deal."
In your research, demographics and competition are major
considerations, just as in a regular franchise deal, but you also
have to consider the personnel and operating issues that go along
with purchasing an existing store.
"We did a lot of work on the people side of the business,
in terms of the leadership at the restaurants, administrative
leadership, etc., vs. how we were going to run them, what players
we were going to keep, which people within our organization we
could offer opportunities and promotions to," says Douglas N.
Benham, senior vice president and CFO of Atlanta-based RTM
Restaurant Group Inc., an Arby's franchisee that purchased 354
refranchised units in 1997.
And then you have the financial results to consider. Dick
Jacobsen, president of Kansas City, Kansas-based Westco Lube, and
his partner, George Eble, participated in Valvoline Instant Oil
Change's refranchising program. Says Jacobsen: "I'd
look at the operating results of the stores for at least the past
three years to see what the trends were, then I'd want to see
the reasons behind those trends. In a lot of cases, you find [the
trend is] downward. Then you have to determine whether you have the
ability to turn them around."
Refranchising is certainly a mixed bag, providing franchisees
the chance to acquire operational units and, sometimes, to amass
debt. "Refranchising can be either a tremendous opportunity or
a curse for the buyer, and there's no simple way to tell which
one it is," Lobel says. "It's a question of making
sure you assess yourself. When you bite this off, can you handle
it?"
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Originally published in the July 2001 issue of Entrepreneur Magazine