Multi-Unit Franchisee Magazine Issue I, 2013 | Page 88

ExitStrategies
By Dean Zuccarello

Future World: Franchising 2018
Position yourself now for the shifts already under way

W

elcome to 2018. The
future of franchising is
upon us. What does the
landscape look like? We
don’t have a crystal ball, but we can make
some educated guesses based on what is
happening around us today, and what is
likely to transpire in the coming years.
The groundwork
President Obama has recently finished
his second term in office. The Affordable
Care Act has been absorbed by the many
businesses it affects, and these businesses
have learned to deal with the incremental
costs through managing hours and taking price increases as the market allowed.
Business owners have also adjusted to
increased income and capital gains taxes,
and have devised strategies to minimize
the bite. After a few years of historically low interest rates and central banks
pumping liquidity into the economy,
inflation has begun to kick in, and this
is now putting a lot of upward pressure
on commodities. Operators who took
advantage of the low rate environment
to recapitalize their business are very
happy that they did.
Franchising in 2018
Based on our observations and projections, here’s what we think franchising
will look like in 2018:
• The refranchising effort under way
by many mature franchise concepts will
continue to the point that all units of these
systems are owned and operated by franchises. Also, all new store development
is done by franchisees. This makes sense
because franchisees are notoriously more
efficient operators than are franchisors. It
also allows franchisors to more effectively
manage their balance sheets.
• Franchise ownership may gradually
become increasingly concentrated in the
hands of a few mega-operators, but this
process will take many years. The con-

86

Multi-Unit Franchisee Is s ue I, 2013

First, take
stock of your
operations
capabilities,
financial
resources,
motivations and
desires.
solidation will allow these operators to
realize increasing economies of scale in
terms of operations and infrastructure.
Mega-operators will be backed by megacapital to provide the resources needed
to obtain mega-scale.
• Franchisees will also take on image
Capex obligations, especially if they are
acquiring company stores. Mature franchisors have been keenly focused on upgrading the image of their units, and have
required franchisees to bear the cost of
image upgrades. It will be important for
operators and investors to monitor ROI
on these expenditures.
• Eventually, some of the mega-operators may team up and buy the brand
from the franchisor in an effort to better
control their own destiny.
• On the other side of the coin, many
concepts, typically newer or less mature
brands, will likely favor a more even balance between company units and franchised units. Explosive growth potential
for these concepts will be attractive to
franchisees and investors.
• Ample capital will continue to be available to fund franchisee growth. The debt
spigot is flowing fairly freely, and there is
a lot of interest from equity players, espe-

cially for sizable and scalabl e operations.
How does this affect me?
“So,” you ask, “what does this mean for
me?” In a word: opportunity. No matter
the path followed by the franchisor of
your system, it is advisable to prepare
yourself to take advantage of what the
future holds.
What kind of actions should you take?
First, take stock of your operations capabilities, financial resources, motivations and
desires, and where you are in your own life
cycle. Determine if you have what it takes
to become 25 percent larger, 50 percent
larger, 100 percent larger, or maybe even
to aspire to be one of the mega-operators
eventually. Remember, you’ll be able to
take advantage of opportunities only if
you are properly prepared to do so. To
achieve this kind of growth, you’ll need
to get your resources lined up:
• What kind of bench strength do
I have?
• How will I add the people resources
I need?
• Should I outsource some administrative functions?
• How can I bolt on to my existing
infrastructure and systems seamlessly?
• Who are/will be my financial backers? How deep is the well?
• Will I have access to both acquisition and remodel capital?
• How do I manage cost increases from
employee health care and commodities?
On the other hand, you may be at
a point in your own life cycle where
you are ready to move on to something
else, or even retire. Given the demand
for franchised operations, there will be
great opportunities for you to transfer
your units into the hands of one of the
growth-hungry operators. But first, you
must be prepared:
• What is my franchise company worth?
• How can I maximize that value?
• What is the best timing for an exit?