Franchisors are refranchising their company-owned units and selling them to you. Is that a good thing?

This story appears in the July 2001 issue of Entrepreneur. Subscribe »

You're a franchisee with 10 units and would like to add more but just don't have the resources. Then your franchisor offers to sell you a dozen company-owned stores for what it would cost to open a few brand-new locations.

What do you do? After all, this is the chance of a lifetime-you'd be a fool to pass it up, right? Not so fast. As franchisees with Taco Bell (more than 1,000 of whom had restaurants repurchased by Taco Bell's parent company, Tricon Global Restaurants Inc., or were granted loans to minimize losses) and several other high-profile systems found out, there's more to refranchising than meets the eye.

According to Dan Boroian, chair of Olympia Fields, Illinois-based franchise consulting firm Francorp, franchisors implement refranchising plans for many reasons. "[Tricon] refranchised because it needed capital," he says. "From their point of view, it makes sense, because they can raise money by selling off company units while also freeing up capital and, more particularly, the responsibility of day-to-day management [of the units]."

It makes sense for franchisees, too, except when the stores are underperforming. "It doesn't work if the franchisor is just selling off units that are losing money to get out from under the negative cash flow or to get rid of units which can't be salvaged by a franchisee," Boroian says.

But for David Lobel, managing partner with New York City-based Sentinel Capital Partners, an underperforming unit isn't always a red flag. His company buys businesses, improves them and sells them after turning them around. "We would pay a price for the business based on the way it was operating at the time," he says, "but we knew that after three to five years, we could significantly improve [the business's] profitability."

Even though the stores Lobel is interested in would probably make a typical franchisee nervous, he does offer advice that makes sense in all refranchising situations: Do your research. "I went in, did the homework, kicked the tires real hard and knew what I was getting," he says. "If I wasn't comfortable with the risk I was taking, I wouldn't have done the deal."

In your research, demographics and competition are major considerations, just as in a regular franchise deal, but you also have to consider the personnel and operating issues that go along with purchasing an existing store.

"We did a lot of work on the people side of the business, in terms of the leadership at the restaurants, administrative leadership, etc., vs. how we were going to run them, what players we were going to keep, which people within our organization we could offer opportunities and promotions to," says Douglas N. Benham, senior vice president and CFO of Atlanta-based RTM Restaurant Group Inc., an Arby's franchisee that purchased 354 refranchised units in 1997.

And then you have the financial results to consider. Dick Jacobsen, president of Kansas City, Kansas-based Westco Lube, and his partner, George Eble, participated in Valvoline Instant Oil Change's refranchising program. Says Jacobsen: "I'd look at the operating results of the stores for at least the past three years to see what the trends were, then I'd want to see the reasons behind those trends. In a lot of cases, you find [the trend is] downward. Then you have to determine whether you have the ability to turn them around."

Refranchising is certainly a mixed bag, providing franchisees the chance to acquire operational units and, sometimes, to amass debt. "Refranchising can be either a tremendous opportunity or a curse for the buyer, and there's no simple way to tell which one it is," Lobel says. "It's a question of making sure you assess yourself. When you bite this off, can you handle it?"

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