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Refranchising Gets Hot Again in the Restaurant Industry

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," Tristano 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, he 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.

"Restaurant organizations, in general, like to work with fewer franchisees" and those who have better infrastructure because "the individual franchisee is going to be very needy," Tristano says. "The multi-unit franchisee is going to have an infrastructure in place to deal with issues that come up."

Tom Kelley, principal of AccessPoint Media Group, and a brand consultant for restaurants, suppliers, retail and hospitality, offers a less rosy picture of the process of refranchising.

"A lot of times unfortunately it's not part of a strategic plan; it's a knee-jerk reaction of having to raise cash or wanting to focus on a new concept," he says.

Many times the locations that chains are looking to get rid of are undesirable or those that have not been updated. While franchisees are likely to get a good deal on the purchase of locations, they also take a big risk, Kelley says.

"Those really don't attract the best franchisees so if the company can't save them it's somewhat unlikely that the franchisee can" without resources to update them, he says.

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