Refranchising: Evaluating It As An option For Your Franchise
In my 26 years of working in franchise development, I’ve seen many opportunities arise for both franchisees and franchisors to leverage the beauty of the business model as a way to strategically grow their enterprises. One attractive aspect of franchising that truly seems to be a win/win for both franchisees and franchisors is refranchising. Through this process, franchisees acquire company-owned units already built and operating, with cash flow in place. Plus, the franchisor exits operations in locations that are either better suited to be run by local operators, or exits in order to become more dialed into overall brand management.
Back in 2015, big-name brands like McDonald’s, Wendy’s and TGI Fridays initiated large-scale refranchising efforts. While the number of franchises being sold varied (McDonald’s sold 3,500 restaurants while Wendy’s sold 500), the goal was the same: shift a greater balance of stores to franchisees in order to increase profitability at those stores and provide the franchisor with more room to manage their portfolio of stores and the brand. As we know, these brands have had their ups and downs, but the last handful of years have been strong for each of them post-refranchising.
If you are considering a refranchising strategy, here’s what you need to think through.
Benefits of refranchising
While not a guarantee, you can expect heightened management engagement with a franchisee-owned location. Although managers and staff at a corporate-owned unit are often incentivized and motivated to achieve performance goals, they don’t have the same “skin in the game” or incentive to perform that a franchisee would have in the local area. Not only are franchisees putting their own sweat equity into the business with resources such as money and time, but franchisees often also bring extensive knowledge of the business with them. They may already have existing relationships with other business owners in the area, or even know the best way to spread the word about a new product or offering. In many cases, they may also already operate a franchise unit or more with other brands, or the same brand.
Similarly, franchisors gain additional cost-saving benefits from refranchising. Operational overhead is eliminated and administrative costs can be reduced significantly.
Additionally, it’s beneficial for new unit growth and expanding the brand’s franchisee footprint. Think of it like a domino effect. Once word gets out about a franchise opportunity for your brand in a local market, potential franchisees will soon be looking to sign up and pursue their entrepreneurial dreams.
Up to this point, it might sound like refranchising is a great deal for the franchisor. But what about the franchisee?
To start, a franchisee is buying into an established brand that already has a presence in the area, as well as existing cash flow. Millions of Americans share the dream of opening a business and being their own boss, and some avenues (such as franchising) make this dream more attainable. Since the brand and its model have already been established in the local market, the franchisee won’t have to worry about completely starting from the ground up.
Finally, due to their knowledge and ties to the local market, a new franchisee also has the potential to further embed themselves in the community by owning a franchise and strengthening the bonds with other business owners and customers alike.
Determining if refranchising is right for your business
While the potential benefits sound ideal, for the Franchisor, it’s important that you evaluate your company’s current situation to determine if refranchising is the right route to take.
Pace of growth
Determining how fast your franchise-owned locations are growing compared to corporate-owned is the first step. While it may seem more ideal to favor one direction or the other, in truth it’s better to have a good mix of the two. So, have you been opening up more corporate-owned stores than franchised ones as of late? If so, refranchising is something to seriously consider. But, if you have been signing a lot more franchise agreements, holding off on turning over those corporate locations might suit you better. It mostly comes down to not throwing all your eggs in one basket. Plus, your franchisees want to see that you as the franchisor can continue to prove out the model and test new initiatives.
Evaluating current performance
You may be inclined not to flip your highest-performing corporate locations. But, if you’re reviewing store performances and find some of your higher performers aren’t reaching their potential, it wouldn’t hurt to consider a change in store leadership from a manager to an owner/operator via refranchising. A change like this can help reenergize store employees and offer a new take on conducting business. Plus, setting up a franchisee operator with a high performing location provides instant validation for further franchisee interest and commitment.
As your company is looking to grow its presence, refranchising is an option to seriously consider. Not only will costs be reduced, but it can also give your brand an edge in a local market by bringing in a franchisee with ties to the community. As franchise development professionals, it’s important to weigh all options when considering refranchising and to be honest with your company as to which benefits are most appealing.
Ed Yancey is vice president of franchise development at B.GOOD, a farm-to-table concept based in Boston, a role he has held since 2018. He has more than 26 years of experience in franchise development and restaurant ownership, and has worked for brands such as Char Grill, Jersey Mike’s and the Briad Restaurant Group, where he has supported both corporate and franchise growth.