Refranchising Pays Off
Opening a new franchise can be exciting, but can also be risky, since it’s difficult to know with certainty if a proper location can be found that will appeal to a sufficient customer base to cover costs and eventually turn a profit. Buying an existing location is a viable alternative. Below is a rundown on the motivations parent companies have for selling off their own stores these days.
Reasons for Selling Out
Franchisors are pursuing refranchising for a couple of primary reasons. Selling company-owned stores can enhance profitability and free up capital. In terms of profitability, a larger number of franchisees also leads to higher royalty payments, which are usually an annual percent of sales and are definitely easier to collect, as opposed to the efforts required to run a store. And money that was used to open and maintain stores can be returned to shareholders or directed toward building brand awareness, introducing new products, or other activities that can drive the value of the system. This extra capital can also be directed toward regions or concepts that are faster growing or have higher return potential. In recent years Jack in the Box has looked to sell off company-owned namesake stores to fund the expansion of its Qdoba fast-food Mexican food restaurant chain.
Many franchise concepts, such as McDonald’s and Burger King, are sitting on valuable real estate that has appreciated over the years and therefore may not be appropriately valued on a balance sheet (e.g. at historical cost). Back in 2006 an activist investor tried to get McDonald’s to spin off its valuable real estate assets into a separate company to better realize their value. McDonald's resisted but did agree to better disclose real estate values to be more open to shareholders.
A number of firms with overseas ambitions are selling off domestic stores to fund international growth. Yum! Brands has been selling off its stable of Taco Bell, Pizza Hut, and KFC stores in the U.S. to focus on China and its international segments. A recent estimate was that the company owns 20 percent of its U.S. stores and wants to cut this percentage in half. McDonald’s is pursuing a similar strategy to fund expansion in China, India, and other emerging markets.
Of course, a firm may look to sell underperforming stores to boost its overall returns. Sonic Corp. has had an issue where same-store sales at partner burger drive-ins (company-owned) have underperformed the franchised ones. In other words, why not let franchisees work their magic, especially when it is demonstrated franchisees are doing a better job running operations.
Bottom Line
While the opportunities to purchase a company-owned restaurant may appear numerous, franchisors are looking to get as much bang for their buck and are interested in primarily in selling off large blocks of stores in certain regions. This usually favors larger investors or franchisees with deep pockets or with an established network of store operations. Of course, smaller chains may be willing to work with smaller investor groups. And there will always be the occasional exception to the rule where a large firm sells off a single store or smaller grouping of locations. The bottom line is that acquisition can a compelling option for picking up a franchise, provided the right opportunity presents itself.
