The Recipe For Success For Restaurant Resales

Posted by Robin Gagnon on Jan 14, 2022 1:55:20 PM

 

With the growth of restaurant franchising, brands have become savvier and more sophisticated, and as a result, the industry has acquired innovative tools to enhance performance. There are now multiple avenues to determine profitability, finely tune specified metrics for growth analysis and examine potential matching franchisees to a brand. However, there is a deficit when it comes to restaurant franchise resale programs.

The solution is actually quite simple. For brands that don’t have a well-defined resale plan, the time has come to get one. It is essential because brands should always anticipate a 10% fluctuation in the industry. The reasons for this potential fluctuation are varied. Perhaps operators have decided not to renew their 10-year contract with the brand. For others, it may be time to retire. I have certainly seen proof of this state of flux as the pandemic accelerated restaurant sales, much of it prompted by owner fatigue.

As a restaurant franchise expert, I see brands handle resales in very unique ways. Metaphorically speaking, and coincidentally, it’s comparable to cooking techniques.

The Recipe For Success For Restaurant Resales

First are the non-cooks. They are microwave only — no cooking attempts even made. These are the brands that pretend restaurant franchise resales do not occur. It damages the brand throughout the pipeline from sales through development, forcing the brand to scramble when franchisees decide to depart. The exit can lead to closed units. These can be units that may have been big producers for the brand.

This transpires because there is no recipe to follow and no plan in place to remarket the location to fellow franchisees or new entrepreneurs. A resale option would have allowed these strong doors to remain open. Instead, turnovers are considered new sales or left up to the franchisee to figure out. What should happen is that operations should be a strong player in transfers and provide training and support in restaurant franchise resale.

Next are the cooks who have a recipe but aren’t utilizing all the ingredients, hoping that in the end, it will taste okay. These are the brands that invite current franchisees to acquire resales. Here’s why the recipe doesn’t work. Internal candidates are not going to pay the highest and best prices. Traditionally, they aim low with inside information on how the unit has performed at every year of operation rather than new buyers who are only focused on the last two years of results. This move undervalues the brand’s resales, which could also depress future sales and new development investment by new candidates.

To peel back the onion one more layer, franchisees acquiring a restaurant from another franchisee puts the brand in a push-and-pull scenario. Who does the brand show loyalty to? Who is the priority? While this scenario may appear strategic, as soon as the buyer pool shrinks because the existing franchisees aren’t interested, the seller is out of luck. The opportunity is not being presented outside of the brand.

Another negative approach to a restaurant franchise resale program occurs when untrained operations or marketing team members assist in valuations. There are two problems with this plan: conflict of interest and legal issues. The brand needs to steer clear of this scenario.

Then there’s the matter of external candidates looking to purchase an existing store. The franchise model is designed to assist with new franchisees and multi-unit portfolio expansion. If resale instructions are non-existent, it creates a misalignment of goals, unrealistic requirements and frustration with the franchisor. No plan means no sale. The recipe failed.

The final and best approach is to be like a chef; have a specific recipe ready and follow it closely in order to guarantee the best outcome every time. The brand develops a complete franchise resale strategy. This involves education for the entire brand to understand succession planning. It’s important to convey clear and effective communication that hits every touchpoint in the operation.

The recipe goes something like this: Identify the candidates for turnover and then partner with restaurant franchise resale specialists to bring qualified buyers to the table. Outsourcing negotiations and valuations maintain neutrality. Examine the franchise disclosure document (FDD) to establish fair transfer fees for franchisees needing to exit. Keep it simple and effective.

The resale plan needs to address unit upgrade requirements to avoid surprises. Requiring remodels during a transfer tends to discourage prospective buyers after they’ve yielded the capital outlay to acquire the site.

Another ingredient in the recipe includes a no-charge new term. For example, I currently work with a major brand that consistently issues a new 10-year franchise agreement for a minimal transfer fee. It’s about understanding cost per acquisition. What is the price of a new franchisee for the brand versus transfer?

By examining cost-per-lead and cost-to-close, the astute brand understands it makes more economic sense to grant a 10-year term than charge a full or even half-price franchise fee. This is a best practice. It’s about long-range planning and profitability, not a quick fix in the moment.

Leadership and support from a franchise brand are crucial. A restaurant franchise resale plan is one more piece of insurance the brand can provide its franchisees. Assisting an operator with a plan of exit is as critical as their entrance. It’s a simple recipe with powerful ingredients designed to serve franchisees and keep the brand on track through smooth transitions and transfers.

 

This article was originally written by Official Forbes Business Council Member Robin Gagnon and published on Forbes on December 13th, 2021. 

Topics: Selling a Restaurant

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