Multi-Unit Franchisee Magazine Issue IV, 2011 | Page 56

Sink or Swim?

Tips for Relieving Distress
O

nce you have looked at what you can control in a
struggling unit, analyze its fixed expenses, such as
rent, royalties, property taxes, and debt service. If costs are
in line and fixed expenses consume a large
portion of your P&L and cash flow, the unit
is in distress.
“Rent and royalties are big. You have
to assume those won’t change,” says multiunit operator and franchisee consultant
Anand Gala.
The following strategies may help cure
a distressed unit:
• Tax relief. Ask your local government
to reassess the value of your property, particularly if the assets of the business have
declined and the property is worth less
than it was when last assessed. Gala says a
franchisee can win this appeal 75 percent
of the time.
• Rent reduction. In this economic
climate, a property owner is not likely to
rent space at the same rate the franchisee
currently is paying. Many property owners will consider
rent relief a mutually beneficial solution, particularly if the
reduction is considered to be temporary. Not every landlord
has found religion, says Gala, but his company has been able
to restructure leases 75 percent of the time.
Attorney Michael Dady of Dady & Gardner also has had

success going back to the negotiation table. “If the space is
going to go dark, the property owner will cut the rent, rather
than have no rent at all,” he says.
• Restructure debt. If you can get out
of your current loan without a substantial
penalty, now is the time to refinance. Many
operators are still paying 8 to 10 percent. An
SBA loan can cut that interest rate in half
and improve cash flow. Keep in mind that
lender and lease negotiations and property
tax reassessments can take months—a big
problem when time is critical.
• Talk to your franchisor. There are
instances when a franchisor will grant royalty
rate relief on an underperforming unit—
but that is typically a condition negotiated
before taking over a unit. Still, experts encourage distressed franchisees to open their
books to the franchisor. Some franchisors
will grant royalty relief, analyze operations,
help implement a marketing plan, or even
help temporarily fund overhead.
If you have hit a wall in your evaluation and negotiations
with the franchisor lender, and landlord, it may be time to
make a hard decision. “If what you have to pay for the rest
of your lease is $50,000 for the year and you are losing
$100,000,” says Gala, “you may be better off closing and
carrying the $50,000.”

Not every
landlord has
found religion,
says Gala, but
his company
has been able
to restructure
leases 75 percent
of the time.

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Multi-Unit Franchisee Is s ue IV, 2011

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