Selling corporate stores benefits all players
ExitStrategies
BY DEAN ZUCCARELLO AND DAN COLLINS
Refranchising Gains
Selling corporate stores benefits all players
Franchising has proven to be a successful business model across a wide spectrum of industries using multi-unit retail distribution . At its heart , franchising allows everyone to focus on what they do best : manage , support , and grow the brand in the case of the franchisor , with franchisees focused on delivering a high-quality , consistent product or service to the ultimate customer .
Refranchising ( the sale of franchisorowned units to new or existing franchisees ) allows franchisors to address both financial and strategic goals in their business by optimizing the mix of company and franchised ownership . Refranchising has been a hot topic in the restaurant industry in particular , with a number of national chains executing large-scale refranchising initiatives over the past 5 years . The Cypress Group led most of these large-scale refranchising programs . We see this activity continuing for the foreseeable future , likely spreading to multi-unit segments outside the restaurant industry .
Historically , most franchised restaurant concepts have operated under an ownership structure that had the franchisors owning and directly operating a “ material ” percentage of their overall system . While this ownership percentage has varied from brand to brand , it was historically significant , generally in the 25 to 50 percent range . The thinking was that this level of ownership meant franchisors would lead by example , essentially showing their franchisees how to operate the business . Additionally , this direct ownership was seen as the best way to align the interests of the brand and its operators .
As it has matured , the chain restaurant business has become much more complex . Increased competition , governmental regulation , changes in the workforce , and consumer preferences have made the business more challenging today than ever . Many chains have concluded that new thinking is needed to address today ’ s environment , with refranchising initiatives becoming an important brand strategy . Although franchisors have historically fine-tuned their ownership of units , today ’ s refranchising initiatives tend to be larger and have more strategic implications .
In recent restaurant initiatives , we have seen franchisors go as far as zero company-owned restaurants . The trend toward larger and more sophisticated restaurant franchisees has helped operators deal with the more complicated business we see today . It also has created demand for large-scale refranchising initiatives in national systems such as Wendy ’ s , Burger King , Applebee ’ s , and TGI Fridays .
So can refranchising be a “ win / win ” for franchisors and franchisees ? In our experience the answer is yes — if designed and executed correctly , with benefits for both franchisor and franchisee .
Franchisor benefits Franchisors gain in several ways : faster system growth , improved financial metrics , and retaining valued home office employees by providing them with more chances to advance . Specific benefits include :
• Capital redeployment to system growth initiatives
• Ability to optimize capital structure
• Reduced volatility in revenue , earnings , and free cash flow
• Comp sales growth driven by a renewed focus on menu , marketing , technology , reimage initiatives , etc .
• New unit growth with expanded franchisee footprint , ideally in combination with new prototypes and corporate initiatives including enhanced real estate and construction resources , incentives , etc .
• Entrepreneurial / growth opportunities for brand employees
Franchisee benefits Franchisees , most often larger ones , also benefit from refranchising initiatives , as seen in the increase in large-scale deals described above . Specific benefits include :
• Improved financial metrics by leveraging existing overhead
• Ability to improve unit-level profits
• Growth in a franchisee ’ s core brand from both acquired units and their franchisor ’ s brand initiatives
• The opportunity to add units in a supplemental brand or brands
• Enhanced career paths for their people , from GMs and managers to frontline employees
Conclusion Ultimately , we believe refranchising is here to stay . These initiatives have the ability to revitalize and improve the operational strategy of major franchised organizations . Franchisors undergoing the process are finding a renewed sense of purpose , and are focusing on innovations and brand management without having to worry about daily restaurant operations . Franchisees are granted the opportunity to grow their portfolios large enough to be able to streamline operations , leading to greater efficiencies , sophistication , and success .
When designed and executed correctly , refranchising encourages partnership with strong players , whether new or existing franchisees , creating a stronger overall system and growth opportunities for all involved .
And , while restaurant refranchising initiatives remain a hot topic , we expect to see the discussion quickly expand into non-restaurant , multi-unit retail systems that can benefit from the same sort of dynamics experienced in restaurants .
Dean Zuccarello is CEO and founder of The Cypress Group , a privately owned investment bank and advisory services firm focused exclusively on the multi-unit and franchise business for more than 25 years . He has more than 35 years of financial and transactional experience in mergers , acquisitions , divestitures , strategic planning , and financing in the restaurant industry . Contact him at 303- 680-4141 or dzuccarello @ cypressgroup . biz . Dan Collins joined the Cypress Group as a principal 3 years ago , following 35 years of experience in the restaurant and financial service industries . Before that he was SVP and treasurer of The Wendy ’ s Company . Contact him at 303-680-4141 or dcollins @ cypressgroup . biz .
74 MULTI-UNIT FRANCHISEE ISSUE II , 2017