The Advantages of Buying a Company-Owned Unit

More franchisors — especially in the food-service industry — are converting company-owned locations to franchises, according to the latest report from food-service consulting company Technomic Inc. and Restaurant Finance Monitor.

To make it easier for franchisees to get into these locations, many franchisors are offering financial incentives and assistance like easier credit terms, lowered or waived franchise fees or reduced royalty rates.

The trend isn’t limited to the restaurant industry, either. 7-Eleven is among the franchisors whose current strategy is focused on converting company-owned stores to franchises.

“The shift toward a heavily franchised business model presents new opportunities for franchisees,” says Darren Tristano, executive vice president at Technomic in Chicago. “Successful franchisees will be expanding their market presence and growing sales by acquiring formerly corporate-owned units.”

For the franchisor, converting company-owned stores to franchises can be a way to earn back the money the franchisor spent opening the unit. This is important at a time when most franchisors are looking to cut costs. If the company-owned store is losing money or just breaking even, franchising it often results in better performance and higher profits because the unit is being managed by an owner-operator who has his or her own capital on the line. If the units are franchised to an existing, successful franchisee who’s seeking to expand, the franchisor gets the benefit of a franchisee whose abilities are already proven.

On the franchisee’s side, the benefits of taking over a location that’s up and running with an existing customer base are clear. But the franchisee needs to make sure the franchisor isn’t overextending itself; franchising too many company-owned units too fast can put a financial strain on a company. Franchisors should also make sure the unit has the right people in place and whether those employees will stay with the unit once it’s a franchise.

I think this trend is a “silver lining” for those in franchising in today’s tough times — and I’m betting we’ll see the strategy continue to grow throughout 2009.