Asset Actions



Every franchisee has to deal with the eventuality of updating their assets. It is an essential part of running a successful business, and too often franchisees that deferred remodeling expenses for so long, saw their customers going elsewhere. Equally, some franchisors that are bloodthirsty for updating their assets do so on an inconsistent and sometimes unfair schedule.

Hey, this is Rick Ormsby at Unbridled Capital. Today, I'd like to talk a little bit about asset actions and remodeling for franchise locations. Remodeling your assets is a critical component of continuing your business to keep your franchise active, to renew your franchise, to bring new customers in the door who might otherwise go somewhere else or to another competitor. And also to understanding the value of your business. Some remodeling that happens on the franchisee level actually drives increased sales and EBITDA because the new assets attract more customers.

Other remodeling programs are more of a necessary evil to defend the EBITDA and the customers that you currently have, but you don't see much sales increase because of it. Either way, understanding remodeling is a critical component to knowing the value of your business and what we counsel our clients on over and over again is know your remodeling program. Too many franchisees don't understand the details of the remodeling program and they don't challenge the corporations whose brands that they operate to define and negotiate what those remodeling requirements would be.

Remodeling could cost anywhere between on the restaurant side at least, anywhere between 200,000 and 400,000 per unit. And so if you own 50 restaurants, or even if you own two or three, that could be a significant component of the value of your business. One of the things I've seen over the years is people making suboptimal decisions on remodeling and new unit development too, but certainly on the remodeling side. And this has typically been effectuated by the long-time franchisees that are typically smaller, that have typically been in the business for 20 to 30 years, who make decisions to remodel restaurants based on their gut or based on history and tradition and not on financial analysis.

I would encourage everyone to do detailed analysis on what remodeling costs are, how they fit into the loans that you have or the development line of credits that you need, how they affect the valuation of your company, how to pace and sequence the remodels over time to not find yourself in a cashflow crunch. And then not to be afraid to look at the value of your business and to realize that there are going to be some franchises out of a group of 20 or even a group of five that might need to be closed when there's a big capital expenditure that's needed.

It is true, I think, that the 30 to 40 to 50% of your best performing franchises are going to drive the profitability of your company while the bottom 20% can create all the problems. And so, sometimes we hang on too long and a better decision would be to get out of the short-term leases, to avoid remodeling expenses where it's not profitable, and to start somewhere else if you need to.

For a year of my life, I spent looking at KFC restaurants store-by-store when I was working at KFC corporate, just doing just this, evaluating what stores needed to be remodeled, which ones needed to be relocated, which ones to sell, which ones to sell real estate on and close the store, where to put multi-branding in place. And so this expertise is a core area for our company at Unbridled Capital. And if you have any other questions, we'd be glad to help you.