Restaurant Franchise Resales are a common occurrence in the franchise industry, yet many brands struggle with this issue. Why? For most, they simply don’t realize that up to ten percent of their units could be at risk for transfer at any time. The larger and more mature the system, the more likely they are to experience transfers. Operators are frequently looking at ten year renewals and deciding not to move forward or commit capital to an upgrade or refresh.
Why Restaurant Franchise Resales Occur
We often talk about the “Three D’s” – death, divorce, and disability. These are real life changing events that occur for your restaurant franchisees, leading to a transfer of the existing stores, even those that are high performing. The other “D” is development. If you’re selling, you’re going to have resales in your restaurant franchise. It’s the inevitable outcome of any successful sales program.
Units also turn over due to the aging of your system and those approaching retirement. Between now and 2030, there are 10,000 baby boomers per day turning 65. They want and need a capital event to exit the business creating restaurant franchise resales for the brand. That’s in addition to those that simply burn out or no longer have the high mindset and commitment they once did to the restaurant franchise system. In those cases, you want them out.
What Happens When Restaurant Franchise Brands Fail to Plan?
Unfortunately, many brands don't have a clear strategy when it comes to their restaurant franchise resales. For some, the plan may not be well communicated or seen as secondary to their primary sales function. This mistake can lead to several issues, such as closed units, damage to sales efforts, and the loss of strong doors where operators cease operations without telling the brand themselves. Brands should acknowledge the turnover, have a program or plan to address those who are moving out of the brand, and ensure that the operational elements of turnovers are not left to the seller.
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Common Approaches to Restaurant Franchise Transfers or Resales
“Don’t Ask – Don’t Tell”- Some brands simply ignore the issue reflecting a “don’t ask, don’t tell” approach. This short-sighted approach leads to several mistakes. It can also lead to closed units, as there is no consistent effort made to remarket the opportunity within the ranks or to external clients.
A second strategy for many brands is the “someone internal will buy it” approach. In this approach, well-meaning franchise development teams just steer all internal sales to existing franchisees within the system. There are multiple problems with this method. First, internal candidates rarely pay the highest and best value for the store. That means the seller does not get the highest values for his business, shortchanging one long term franchisee in favor of another. Specifically, this creates a dichotomy of representation, where the brand is stuck between their outgoing franchisee and their incoming franchisee for the same location.
When using the “someone internal will buy it” method, it is not uncommon to see a request for the franchisor to serve as a arbiter for any disagreements in the transaction. Lastly, there are only so many existing franchisees for a brand seeking to expand. By consolidating ownership among fewer operators, franchisors also face risks with lots of control in fewer hands, with implications for their franchise advisory council makeup along with control over co-op dollars. This approach feels good at the outset and masquerades as a strategy, but as soon as the buyer pool shrinks because the existing franchisees aren't interested, the seller is out of luck.
What is the Best Approach to Restaurant Franchise Resales?
The final approach is, what we consider to be the best strategy and far superior to the “don’t ask, don’t tell and “someone internal will buy it.” We term the final strategy, the “Net Restaurant Growth” strategy. In this approach, the brand looks at their existing restaurant locations and understands that transfers will occur. They develop important franchise resale strategies and relationships, educate their internal teams about holding discussions related to succession planning and turnover, and identify candidates within their brand at risk for renewal and those non-compliant with the system to prioritize them for transfer.
Once the brand identifies candidates for turnover, they engage with a restaurant franchise resale specialist. These external resources are aware of their financial and experience requirements and bring qualified buyers to the table. Negotiations and valuation are outsourced to this independent third party, which is where they should be.
Those using the “Net Restaurant Growth” strategy look at their Franchise Disclosure Document (FDD) and set fair and reasonable transfer fees based on the long-term value of retaining that unit versus a one-time lump sum. They carefully monitor the refresh and upgrade requirements so there are no surprises. They don't get greedy and see a transfer as a time to require an entire refresh of the unit unless they are interested in running off buyers who are already investing capital to acquire the store.
Those pursuing net restaurant growth also give away new terms instead of charging for them. One major brand in our portfolio of clients always issues a new 10-year agreement for a minimal transfer fee. Another brand we work with routinely tries to squeeze an extra $40,000 (three-quarters of their existing fee) out of their candidates on top of the franchise fee. Guess which brand gets more transfers done?
What’s Your Next Step for Franchise Restaurant Resales?
A well-defined strategy for restaurant franchise resales is crucial for the success of any franchise system. It's essential to acknowledge the turnover, have a program or plan to address those who are moving out of the brand, and ensure that the operational elements of turnovers are not left to the seller. Brands should prioritize their existing franchisees who want or need to exit and offer a restaurant franchise resale program that respects their investment and maximizes their return.
If you're a franchisor struggling with resales, don't worry. There's a way to establish a successful strategy for your system. Schedule a call for a full evaluation of your restaurant franchise resale program, and the experts will review your process and help you develop a strategy for success. Don't assume that the “Don’t Ask, Don’t Tell” or “Someone Internal will Buy It” methods will help you reach your development goals. Take your franchise system to new heights with a well-defined restaurant franchise resale program and contact We Sell Restaurants for assistance.
Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE, is the co-founder of We Sell Restaurants, a brand that has carved an unparalleled niche in the industry as the nation's leading and only business broker franchise focused on restaurants. Under Robin’s leadership, We Sell Restaurants has grown to 45 states where it dominates the restaurant for sale marketplace, including franchise resales, delivering on the founder’s vision to Sell More Restaurants Than Anyone Else. We Sell Restaurants was named one of the most influential suppliers and vendors in the country by Nation’s Restaurant News and has earned a position on INC 5000’s list of fastest growing privately held companies. Franchisees of We Sell Restaurants surveyed by Franchise Business Review placed it 25th in the nation in franchisee satisfaction.
Robin is the Chair of the Women’s Franchise Committee of IFA and is a member of the IFA Board of Directors. She is also an MBA and Certified Franchise Executive (CFE) and has her CBI (Certified Business Intermediary) designation from the International Business Brokers Association. She co-authored Appetite for Acquisition, a small business book award winner in 2012 and contributes frequently to industry press appearing in Forbes, QSR, Modern Restaurant Management, Franchise Update, and others. Entrepreneur has named her to their list of the “Top Influential Women in Franchising.”