To understand recent changes in franchise negotiations, first consider the shrinking number of company-owned restaurants, due largely to refranchising. Consultant Ed Teixeira of franchisegrade.com says the number of company-owned QSR outlets at the franchises
he tracks tumbled from 20,178 at the end of 2009 to 18,683 by the end of 2015.
Now consider that many buyers are well-managed and well-funded franchisees who already have brand portfolios. “That means franchisors might be willing to negotiate terms that they don’t for small area developers,” Teixeira says.
Here’s a look at five areas where franchisees with leverage are finding wiggle room in franchisor contracts.
Franchise agreements typically insist that franchisees can’t operate a competing brand. Which makes sense—except when it’s a multiunit franchisee’s backers doing the investing. Those investors may also own pieces of other franchisee-run companies.
“Franchisees want an exclusion clause in a noncompete that says, ‘As long as their investors are not involved in operations or receiving proprietary information,’” says Results Thru Strategy’s Lynette McKee, a former vice president of franchising for Dunkin’ Donuts.
Elie Khoury—a franchisee of TGI Fridays, Taco Bell and Newk’s Eatery—calls the issue of requiring a personal guarantee a “hairy one,” because a CEO of a large franchisee isn’t likely to sign one. It may be easier to seek a corporate guarantee from the mother ship, says Khoury, CEO of Southeast Restaurant Group. By that he means the company buying the franchise.
McKee tells clients to give franchisees flexibility on this point. “There are a host of things you can do to structure a personal guarantee to protect the brand,” she offers, citing a large multiunit franchisee that gave her audited financials. “We had that deal done very quickly. A lot of franchisors would have handed them a standard individual application.”
“If you want a bigger discount on franchise fees, it’s likely you’re going to be asked to accelerate your development timetable,” says Aziz Hashim, CEO of Atlanta-based NRD Holdings, which franchises 15 fast-food restaurants. “If the franchisor would like you to pay for all 50 units in full right now, you’re probably not going to want to write a $2 million check,” he explains. “So that sum can become a point of negotiation.”
McKee says some franchise agreements may charge $5,000 for a transfer of ownership. If the group has 100 units, that could be a $500,000 transfer fee when a non-operating investor simply cashes out. Her solution: “If they are transferring investor partners, we only charged about $100 or $200 per unit to transfer.”
Large multiunit franchisees often have their own training departments. That’s the case at Apple-Metro, which operates 38 Applebee’s in New York. Five units are used as training centers, says CEO Zane Tankel. “We don’t go to Kansas or California for training. But we’re certified by the franchisor, which looked at our training metrics,” he says.