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Refranchising Gets Hot Again in the Restaurant Industry

Of course, Perales will need to do more investment including some closures, moves, and updating of restaurants, but he is optimistic of the potential for returns.

"We've done it before. It's not as easy as it looks. It's like a marriage. The brand has to have a lot of faith in you as franchisee to run the stores right, to remodel and to rebuild. They're looking for the franchisee to be the right partner," he says. "You're required to put a lot of cash back into stores ... to keep the operations running better."

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To be sure, franchisors are not looking to sell all of their corporate stores. Having a small test market is still needed to test new products and stay relevant to what's happening in the trenches. Experts say that franchisors that don't "have skin in the game" should for the most part be a red flag for franchisees. (Two exceptions are Subway and McDonald's (NYSE:MCD), he says.)

Sizzler is one such brand.

Once with 600 stores, new management in 2008 halted Sizzler's franchising program. Of the remaining 170 currently, 19 are company-owned.

After nearly four years of initiatives to breathe new life into the 54-year-old brand, which included bringing in new management, paying off the company's debt, and overhauling the menu and pricing, the final piece that was needed to complete the revamp was updating its locations -- and for that they needed help.

"The difference between a remodeled and non-remodeled restaurant was 6%-8% more sales and positive guest count versus flat. The remodeled look changes the whole perspective of what people thought about Sizzler," Sizzler USA CEO Kerry Kramp says. "We're confident we can move outside of California and continue to develop the brand."

This past February, Sizzler signed its first deal with venerated multi-franchisee Tony Lutfi since its revamp began in 2008, agreeing to sell five locations in California and allow Lutfi to open five new Sizzler's in the San Francisco Bay area. Lutfi's portfolio includes Jack in the Box (NASDAQ:JACK) locations, Church's Chicken, Arby's, and Little Caesars.

The company is looking to sell more stores to franchisee heavyweights to essentially endorse its new look as it moves towards expansion again, but that doesn't mean it plans to move entirely away from corporate-owned stores.

The cash gained from selling off some stores would be used to accelerate more remodels and build more company-owned restaurants, Kramp says.

"We intend to develop more company restaurants. We don't know the exact ratio but we like the thought of having company-owned restaurants," Kramp adds.

Sizzler plans to announce a second multi-unit deal. Kramp declined to offer more specifics.

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