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Refranchising: A Win-Win Deal?

Refranchising has always been a hot trend of the decade in franchising. The all-important question: Is refranchising beneficial franchisors, franchisees, or both?

Refranchising

Refranchising

Refranchising is basically about selling the franchisors’ own units to franchisees. So, yes, franchisees are buying established franchise business with well-run operation and positive cash flow.

To me, refranchising is a blessing – I am tired of starting up, and with franchising I expect more than just a start up business. For you who share my vision, you might be interested in refranchising, as well.

Why do franchisors refranchise?

Firstly, you need to know that own units are not always started up by the franchise company. Instead, franchisors are quite often buying-out franchisees’ units, due to numerous reasons, including under-performing franchise units, ‘bad franchisees’ problems, and divesting franchisees (that are usually leave a good performing franchise unit to pursue other endeavours.)

From several franchisors I know, I learn that the majority of them are having these two common reasons in acquiring franchisee’s units:

  • They implement ‘buy low, fix, sell high’ strategy – By doing so, they will receive a nice capital gain for selling a ‘fixed’ franchise units to potential franchisees.
  • They use the acquired units for training and/or pilot project (or testing ground) purposes – They use the units to train new staffs (and franchisees) live, hands-on franchise operations. They also use the units to test new services and/or products, new concepts and new systems.

Well, maybe there are more, but they won’t leak much information to a franchisee, right?

Is refranchising a win-win deal?

I view refranchising as a win-win solution for both franchisors and franchisees.

For a franchisor, refranchising allows the franchise company to create capital through the sales of company-owned units, while releasing some pressure of the headquarters’ management (while keeping the business operations lean.) The downside: No more or less operational training facilities and testing grounds.

For a franchisee, refranchising offers an opportunity to own a good performing, established business. This means real cash flow and a well-measured return on investment (without worrying much on achieving the break-even point, in which all business startups – including franchises – are worrying about.) The downside: Expensive.

Given the above arguments, it’s imperative for the franchisees not to take refranchised franchise units at face value – You need to do your due diligence to discover the ‘real’ value (or as Warren Buffet called it, intrinsic value) of the franchise unit. Once you do get the overall picture of the deal, you should negotiate, negotiate and negotiate.

Ivan Widjaya
Refranchising

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