The Advantages of Buying Franchisor-Owned Locations

On occasion, franchisors make company-owned locations available for sale to franchisees. This is called either retrofranchising (locations that have never been franchised) or refranchising (locations that once were franchised but were acquired and operated by the franchisor). For all practical purposes, for franchisees looking to invest in established businesses, they are the same.

Franchisors have many reasons for wanting to sell company-owned locations:

• They may no longer fit the franchisor’s strategic plan.
• The franchisor may want to consolidate the number of markets or number of locations it directly operates.
• The franchisor wants to stimulate the development of additional units in a market, and providing franchisees with cash flow from established units is part of that strategy.
• The franchisor may simply need the proceeds from the sale.

In some situations, franchisees are just better at operating locations than the franchisor, and the franchisor is selling locations simply because it believes the locations work better under the control of a franchisee than under the franchisor’s own personnel.

Acquiring an existing location from another franchisee or from the franchisor has many advantages:

• It shortens the time to get the business up and running because you don’t have to find the location or work through constructing and equipping the business — and it already may have a trained staff and management team.
• Bank financing may be easier because the business exists.
• The seller may offer seller financing, and a motivated seller might be willing to cut you a good deal.
• You are buying a business that currently is operating, has existing customers and an established cash flow, and you know the performance of the operating business. Your investment decision is based on current operations and not on projections.
• If the location is being sold by the franchisor, it can share with you the financials for the location, even if it doesn’t include an Item 19 Financial Performance Representation in the FDD.

As with any purchase, you should take your time to evaluate the business. Sometimes you will find franchisors that are churning locations. Churning occurs when a franchisor is selling a company-owned location that it may have taken back from a franchisee because the unit is failing or has failed.

If the unit wasn’t viable before, there is a good chance it won’t be viable under new ownership either and likely should have been closed. Churning frequently happens in some systems where the franchisor is trying to avoid disclosing in the FDD a unit failure and instead buys a failing location before it closes.

Always get a history of ownership of any business you are looking to purchase. Don’t assume that you are a smarter or better operator than the last guy. A franchisor that has a high percentage of churning may offer little chance for success to any type of franchisee and so may not be a sound franchise investment — even for franchisees not buying one of these recycled locations. Thankfully, not many franchisors churn their locations, but you still have to be alert to the possibility.