Over the past few years, many of the larger restaurant chains have reduced the percentage of their company-owned locations by selling them to franchisees. During 2017, such refranchising was common in our industry. For example, McDonald’s® was wrapping up its multi-year effort to turn about 4,000 locations over to franchisees. Applebee’s® locations became almost completely franchisee-owned, and Sonic® finished its own effort to accomplish the same.

Will the trend continue into 2018? Although there haven’t been any major announcements in recent weeks, the motivation underlying refranchising strategies still remains. The old standard of keeping roughly a third of units under company control is being replaced by an investor-driven belief that the best use for corporate capital is spurring productivity and growth, not supporting operations or remodeling projects. Instead of having to balance corporate goals with the realities associated with operating locations, the approach allows the franchisors to concentrate completely on strategy.

The fact that this refranchising activity comes at the same time that many chains are demanding costly overhauls of locations also suggests that they’d rather see franchisees bear the remodeling costs.

If you’re a franchisee, is refranchising activity a positive or negative sign for the investment you’ve made in the franchisor’s brand? The eagerness of franchisees to pick up company-owned stores suggests that there is a great deal of inherent value in the brands. A company focused on meeting aggressive goals for refranchising is more likely to offer advantageous pricing to existing franchisees. Not only is the company under pressure to divest itself of the units; management wants to be sure those units will be taken over by someone with a proven record of success (especially since they’ll get a hefty percentage of that success through fees). And, because most franchisees are physically closer to and more involved with the daily operations of locations than the faraway corporation, they can do a better job of running the locations efficiently and profitably.

Do you have an opportunity to capitalize upon a refranchising program offered by your franchisor? You may have a narrow window of time in which to take advantage of that opportunity, so finding affordable financing will be critical. First Franchise Capital Corporation’s™ cash flow and asset-based financing programs are designed around the realities of franchise businesses, and may give you the most practical way to expand your network. Why not have a conversation with our lending specialists?

About Oak Street Funding

The materials in this paper are for informational purposes only.