franchising aspects Feb, 10 2010

Refranchising: A Profitable Business Concept

With the economic downturn, the concept of refranchising is gaining quick currency with franchisors. Let us find out the impetus behind why franchisors are selling off their own stores to the franchisee

By Ramanjit Kaur
Feature Writer
Refranchising: A Profitable Business Concept

Refranchising has gained huge success as a profitable business concept. Franchisors today are pursuing refranchising for a number of reasons. One of the prominent reasons for selling company owned stores is enhanced profitability. It is an excellent way to increase the profit margins because this way the company generates high value franchise fees and royalties without spending money on the management of the various company owned outlets. In addition, a number of companies sell off their outlets to fulfill their overseas ambition to fund their international growth.  In addition, refranchising is beneficial even for the franchisee as it is a safer option for the prospective franchisees to get started with an already functional business. The process of converting the company owned outlets into franchised outlets is also widely known as retro-franchising.

Reasons to refranchise

There are several reasons to adopt the process of refranchising. It can be beneficial under a number of circumstances such as:

Management related issues: In case, the company is facing problems in managing the wide network of company owned outlets.

Threat from franchised outlets: When the company owned outlets are suffering because of the opening of franchised outlets (under similar trademark) in the same locality.

Money matters: Refranchising is a strategic way to raise finance for the growth of the company.

Important points to move ahead with refranchising

In refranchising, the franchisor converts his/her company owned outlets into a franchised outlet. However, this wonderful franchise business opportunity can turn out to be disastrous if not planned cautiously. Enlisted below are few important points that a franchisor must consider before refranchising:

Structured planning: As a franchisor, you must customise a plan regarding the franchising of the various company owned outlets. There is no doubt that refranchising raises the profit margin for the franchising company but only if suitable stores are refranchised. Franchising of poor operating company owned outlets cannot turn around the sales or profits. Therefore, it is always recommended to the franchisor not to franchise the company owned outlets from which s/he is not getting adequate return on investment. In other words, refranchising cannot be used as a fix strategy to improve the working of troubled outlets.

Reasonable rates: Conversion of a company owned outlet into a franchised outlet should not be based on unrealistic pricing. In other words, a franchisor need not over rate his company owned outlet just because it is already in an operational mode. A franchisor has to understand the investment limit of the franchisee and the value of his/her outlet.

Realistic information: Being a franchisor, you are supposed to provide all the necessary information that a franchisee requires to carry out the daily functioning of the refranchised outlet in an effective and efficient way. A franchisor should not exaggerate the information regarding the profitability of the outlet. Additionally, franchisors should provide detailed records regarding capital improvements, delayed maintenance and other kind of asset quality issues that are not easily gleaned from the due diligent process.

Skilled workforce: A team of skilled professionals can help a franchisor to successfully refranchise the various company owned and company operated outlets. The process must involve a franchise advisory from an experienced attorney. It is said that, the more efficient and effective a team, the more smoothly the process of refranchising works.

Timing and good franchisees: Sometimes, a franchisor thinks that s/he can sell the stores within months but in reality, s/he should not hurry in refranchising the various company owned outlets. S/he should take enough time in selecting the right franchisees for his/her various outlets in order to ensure a satisfactory progress.

Special incentives: In order to ensure the proper functioning of the refranchised outlets, a franchisor can offer a number of incentives to his/her franchisees. Take for instance, a franchisor can encourage his/her franchisee by:

  • Providing royalty-fee relief
  • Assisting in additional advertising funding
  • Deferring franchisee fees for new development
  • Offering free training services   

This kind of support can help in the making of an effective refranchising program, predominantly for the under-performing markets.

Strategic procedure: The process of refranchising should be deliberately structured and well thought of so that it can fit into the franchisor’s long term plan (of handling the various corporate and franchised outlets). This strategic approach is necessary, as the existing franchisees may feel a bit disgruntled for not getting the operational stores that the other aspirant will get through refranchising. So, a franchisor is always advised to convey the entire process effectively to the franchise business community in order to avoid an imprudent reaction from them.

In short, refranchising can be a wonderful modus operandi for every business today. All a franchisor needs to do is to chalk out a plan and implement it with great care.

Related: Fundamentals of Micro Franchising

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