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Refranchising Gets Hot Again in the Restaurant Industry

Restaurants have struggled for years -- and particularly in recent times -- to build profitability.

"They've taken on debt and increased capital expenditures because of remodeling restaurants, enhancing risk efficiencies, adding equipment," to be able to create new and more appealing items, Tristano says. Refranchising takes the burden of running the restaurant off the company. "They're basically running the brand and not the restaurants," Tristano adds.

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When DineEquity announced in July the sale of 65 company-owned Applebee's in Michigan to TSFR Apple Venture LLC, the company noted that its "increasingly franchised business model is less capital intensive and experiences less volatility in cash flow performance compared to the operation of company-operated restaurants."

As of July, the company had sold or entered into agreements for all of the 510 domestic Applebees restaurants, leaving just 23 units as test markets for the parent company.

Refranchising is becoming increasingly attractive for both sides of the transaction.

"Independents have been struggling. As a result, chains continue to dominate in the restaurant industry," he says. "It's a good opportunity to be refranchising."

Company-owned stores tend to be in markets close to headquarters so they're easier to manage. Depending on the strategy, if stores are updated, parent companies could maximize the sale price, but more than likely they want to offload underperforming units as fast as possible. Franchisees can acquire locations for cheap and get an immediate return on their investment once they update the stores, Tristano says.

But the strategy isn't something that individual franchisees are likely to get in on. In many cases, companies will approach existing franchisees with the offer, then ideally take it to a franchise group that is managing other non-competitive brands. Beyond that, perhaps they will turn to individual franchisees in the market, Tristano says.

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