What Is Refranchising?

In the restaurant industry, selling franchisor-owned restaurants to local franchisees, or refranchising, seems to be the latest rage. Consider the recent example of McDonald’s. The restaurant chain hopes that refranchising will reduce its annual general and administrative costs by around $500 million in the next few years.

There are several reasons why a franchisor might seek to refranchise. A franchisor that owns its own restaurants is responsible for every aspect of those local operations. Just as with home remodeling, restaurant décor must keep up with the times, in addition to ongoing upkeep and maintenance. McDonald’s has launched a store improvement plan that includes features such as faux leather chairs, wooden tables, and other amenities. 

By selling restaurants to franchisees, McDonald’s won’t be responsible for the capital expenditure associated with those upgrade and maintenance costs. In addition, McDonald’s receives a per-store fee of $45,000 from a franchisee that opens a new restaurant.

Is there a downside to this strategy? According to one commentator, McDonald’s has had a rocky relationship with its franchisees recently. That characterization should be a significant consideration to any prospective franchisee. Whereas franchisors have to divide their attention, a franchisee can focus his or her attention on running the local business. Yet if that direction is impeded by a franchisor’s frequent interruptions, the ability to make a profit might be compromised. An attorney’s due diligence can help an individual make a more informed choice about buying into a franchise.

Source: The Motley Fool, “This Is Why McDonald's Corporation Is Refranchising So Many Restaurants,” copyright 2016, The Motley Fool