Multi-Unit Franchisee Magazine Issue I, 2013 | Page 65

Know When to Fold ’Em!
“A poor-performing franchise clearly damages the brand equity for
the franchisor and franchisee... there comes a point when we have
to ask them to leave for the good of the whole.” — Dina Dwyer-Owens
for franchisees include clauses about continuous operation and
dark stores. What’s critical on the front end is to negotiate a
lease without those clauses if you can, but once you’ve signed
it’s a matter of dealing with the landlord on how to get out.
Contacting a landlord on the front end is a lot easier than
doing it later, when the situation has deteriorated even further—but it’s not a 100 percent guarantee you’ll get what you
want, or even cooperation. “A
lot depends on the quality of
the center and the demand,”
says Patrick Bradley, an attorney with Bradley & Deike in
Edina, Minn., who has represented franchisees for more
than 30 years. “Landlords have
to be concerned about dark
centers,” he says.
“If we get to them ahead
of time, and not after closing
without notice, landlords for
the most part are reasonable Patrick Bradley
because they understand the
economics of the situation—not necessarily easy, but reasonable,” says Bradley. “In most cases we’ve been able to negotiate
an early termination. The landlord understands that if a tenant is struggling, it’s better to work out a mutually agreeable
transition. It sure beats chasing them.”
“Larger landlords aren’t as dependent on one tenant in one
shopping center,” he says. “They have their assets spread over
a larger base, they understand the economics, and they don’t
take it personally.” Smaller ones, he says, often don’t have the
economic understanding or wherewithal to appreciate the
franchisee’s situation.
In one deal, says Ostrowe, “The biggest relief I needed was
the landlord’s. The lease was bleeding us dry. I had to go in and
say that it was easier to litigate than pay the rent. The facility
was bad and the price was too high. If we didn’t renegotiate,
our choice was to shut down. I didn’t want to threaten these
guys, but you have to make them understand when a location
is bleeding cash.”
“When you’re getting ready to sign a lease, fully understand
the commitment and responsibility you’re stepping up for—and
what’s the worst that could happen,” says Umphenour. “How
am I going to handle it if it doesn’t do what I think it will do?
Ask the right questions before you go in.”
• Lenders. Lenders, on the other hand, typically look favorably on a decision to shut a cash-bleeding unit, says Hashim.
“For a multi-unit organization, they’re happier if you don’t have
a negative cash flow on your books. Your EBIDTA goes up if

you close a losing store,” he says. “I’ve never in my career had
a bank that had a problem with me resolving a negative cash
flow store.” Assuming all the other factors permit you to close,
he says, most banks are supportive of anything that makes the
enterprise stronger.
Of course it depends on the specific circumstances, says
Zuccarello. It’s easier if you have one lender covering all your
assets. “For example, if you have 10 units and one’s a dog, the
lender is interested in seeing the overall strength of the company improve. What they give up in fixed collateral they’re
going to more than substitute in improved cash flow.” And
whil