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Channeling Real Estate Assets Into Expansion

There has become a new normal when it comes to real estate and franchise expansion. Many franchisors are trying to determine how to best channel their real estate needs into their expansion goals. Navigating through these tough economic times has many in the franchise community scratching their heads considering what they should do next. Here are some new ideas on channeling real estate assets as companies navigate expansion this year.

Create a Winning Situation for Everyone; Save What You Already Have
In today’s economic environment, some franchisors are finding that some of their franchisees are struggling and unable to meet all their financial obligations. They may have franchisees struggling to pay royalties, marketing funds, rent or small business loans. Each one of these hardships affects the franchisor just as highly as the franchisee. Not receiving royalties, having units close with the need to report them in the franchise disclosure document and loan failures affecting the Small Business Administration registry are all issues which can slow growth.
If your brand has a franchisee who is struggling to make ends meet, your first priority is to evaluate what can be done to ensure that the franchisee makes it through these difficult economic times. The first step to expansion is making sure you’re not sliding backward. It is much easier to save a current franchisee from failure than to try to sell, train and develop a new one.
Having an inside team of distress experts or an outside consultant who is trained, skilled, proficient and knowledgeable on how to negotiate and conduct pre-closure workouts is essential in this new economic environment. Assisting your franchisees in persuading landlords to grant rent reductions instead of having another empty unit in their center or a bank to defer payments, instead of having a loan default not only helps the franchisor in maintaining royalties, but keeps the unit open and the franchisee from losing the investment.
Many franchisors focus on attempting to save a point on cost of goods or a point or two on labor; however these situations are not going to make much of a difference. Occupancy costs and debt are areas, if addressed properly, can affect the bottom line by 15 points to 25 points. This could make the difference between a franchisee closing or remaining open.
Occupancy costs and debt are areas, if addressed properly, that can affect the bottom line by 15 points to 25 points.

One recommendation would be to take a proactive approach this year, review the real profitability of each franchisee, and determine what can be done to make it a winning situation for all parties.

Reduce Your Franchisees’ Real Estate Costs
Most all of us are aware that in most markets, real estate is not the same as it was five or even 10 years ago. Many franchisors have franchisees that signed leases over this period of time and are now finding themselves signing their first or second lease option, which almost always has steep increases attached to them. The dilemma with this is that over the years the lease calls for increases, but the market has actually declined. This could place your franchisee in an unfair or uncompetitive situation. As a result, many new tenants are paying much less than the older tenants. Is this fair?
Many franchisors are now are taking a proactive approach in assisting franchisees with comprehensive market studies and helping franchisees get rents negotiated at current fair market rates. There are instances in which franchisors help franchisees save tens of thousands of dollars each year with what is now known as a “Blend and Extend.” Take a proactive approach and conduct a market study and competitive analysis for your franchisees. By assisting them in obtaining a lower rent for the next five or 10 years, franchise companies can do more for their bottom line than any cost of goods or labor management system they could implement. These programs can put meaningful dollars into bottom lines. The best part of this program is that it is fast, effective and lasts for years with no further effort involved. Imagine saving your franchisee 10 percent to 30 percent on occupancy costs.
As part of the “Blend and Extend” program, some franchisors are also using this time to negotiate tenant improvement dollars for franchisees who are now in need of re-imaging their franchise units. By taking advantage of the current market, your organization can channel real estate dollars into enhancing your brand and setting your franchisee up for success for years to come. The franchisees who have experienced this help from their franchisor have also been able to help the franchisor with validation when speaking with potential franchisees. Several chains are currently looking at all units with leases expiring in 18 months or less and are beginning now to assist their franchisees in negotiating these savings. Most landlords who are willing to look at the “Blend and Extend” begin the new lower rents for the franchisees immediately saving them serious money.

Channel Your Assets by Using Outside Consultants
Over the past few years, many franchisors have reduced corporate staffing and no longer have a need for a full-time real estate or development department. Other franchisors have never had a development department and are not yet at the level to bring it in house, but are too busy to do it themselves. Many of those companies are now using outside consultants or firms to coordinate some or all of their expansion activities. By outsourcing, the franchisor reduces general and administrative expenses, saves office
The benefits of using outside consultants are many. First, they deal with very similar issues daily. Second, they have systems and efficiencies which allow them to deal with and navigate through many different files each month and effectively coordinate your needs. Third, they are professional negotiators who are used to dealing with a variety of situations and are focused on a particular area. And finally, the cost of hiring an outside consulting firm is normally much less than having an in-house person, allowing the franchisor to channel development funds elsewhere.

Sale-Leasebacks
Sale-Leasebacks are the sale of your real estate in return for a long-term lease. Although this is not new, the process is now being utilized for a much different reason. Since money is much harder to obtain these days for franchise expansion, sale-leasebacks are becoming a funding vehicle for franchisees expansion. By taking assets you own and unlocking the equity you have in your property, you are able to redeploy and create the cash you need to expand.
Many multi-unit franchisees that currently own and hold property where their franchise is located are selling their property and building, then signing a long-term lease with the buyer. This enables them to cash out of a project, keep their franchise business operating and use those funds to build another location. Many franchisors are putting potential landlords in touch with franchisees who have the desire to take advantage of sale-leasebacks.
If any of these ideas have caused you to think about your brand and prompted reflection on what your organization can do better to serve the franchise community, consider seeking one of the IFA Supplier Forum members to meet your needs at www.franchise.org under the “About IFA” tab. 

Ron Stilwell, CFE, is president of Franchise Executive Consultants, LLC, a specialty franchise consulting firm which offers franchisors and franchisees services to improve profitability immediately during distress situations. He can be reached at 480-688-0411 or rstilwell@franchiseexec.net.

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