Impact of Refranchising

By Rick Ormsby
Managing Director

When I first started working in the franchise industry at Yum Brands, most franchisors of legacy concepts owned 15-20% of their total locations. This was actually a reduction from the 90’s, when many franchisors were buying back franchises in order to increase their span of control and ownership at the corporate level.

Fast-forward to the current environment, and Wall Street and investors alike favor the asset-lite franchisor model. For Yum Brands particularly, this means a company ownership model of 3% or so of the total units throughout the USA. Wendy’s has already effectuated this same plan, and others have or are doing so as well.

Why? Primarily, operating a franchise brand with fewer units is a much, much more profitable business model. Sell the stores, and let a franchisee battle leases, minimum wage concerns, inflationary pressure and incessant remodeling requirements.

Franchisors have typically been characterized as poor operators as well. They typically don’t have a local mindset when developing and keeping customer relationships in individual communities. Franchisors generally don’t take advantage of increased pricing opportunities either, which can oftentimes dramatically increase the profitability of operations in a hurry for franchisees who are keen to maximize profits.

For these franchisors, the goal is to sell corporate assets to franchisees in a frothy marketplace, collect a big amount of proceeds to pay-down debt or return capital to investors and collect increased royalties and advertising fees – all while doing much less work. It is certainly a more profitable model.

Currently, we see pressure from hedge funds such as Marcato, trying to force Buffalo Wild Wings to franchise. There are other high profile examples in the marketplace as well.

At Unbridled Capital, we expect to see this trend continue in the near term. Taco Bell, Pizza Hut and Sonic are a few brands that should have some near-term refranchise opportunities. These deals typically are 15-30 units in size with heavy competition in larger, metro markets.

While these deals have competition from a variety of sources, the successful bidders on Corporate refranchises will be adept at navigating through the red-tape and presenting proposals that franchisors want to hear. And, as someone who has worked for Yum and has many, many friends who are executives at several of the world’s largest brands, we offer the access and expertise and access that could make the difference when trying to differentiate yourself in a competitive bid situation. Give us a call anytime.