All Articles Food Restaurant and Foodservice Can franchisees succeed when corporate parents fail?

Can franchisees succeed when corporate parents fail?

3 min read

Restaurant and Foodservice

The number of U.S. franchisees is on track to grow 1.7% this year, the first increase in units since the recession hit, according to the International Franchise Association. Several major chains are moving to sell more corporate stores to franchisees, to raise cash and cut costs.

But what happens to successful franchisees when their parent company fails?

Quiznos franchisees narrowly escaped the question when their Denver parent avoided filing for bankruptcy this year. Instead, hedge fund Avenue Capital Group stepped in, paid off about a third of the chain’s debt and injected about $150 million into the company, to fund initiatives including significant investment in menu items, store improvement and an ad campaign for the 2,700-store chain, Nation’s Restaurant News reported.

Franchisees at other troubled chains have had to band together to keep their eateries operating, including Ground Round. The company’s abrupt 2004 decision to close its 59 company-owned locations and file for bankruptcy basically left franchisees with the choice of giving up and closing down or protecting their investment by banding together and buying the company. The went with the latter: Franchisees with 72 units in 19 states paid $2 million in cash and financed $3 million to acquire the company under the Ground Round Independent Owners Cooperative, Entrepreneur reported.

Pat & Oscar’s franchisees were less successful in obtaining rights to the brand. Instead, nine of 11 Southern California eateries that remain of the chain, which started in 1991 and filed for Chapter 7 bankruptcy liquidation last fall, will rename themselves O’s American Kitchen and carry on with a new look and menu, The Press-Enterprise and other media outlets reported.

Sometimes, changing the name makes sense even if hanging onto the old one is an option. Other times, brand equity built over the years is worth holding onto.

“If a restaurant had a terrible reputation, franchisees may want to start over,” Technomic’s Ron Paul told Entrepreneur. “But if there’s still equity in the brand, they might be better off sticking with it. If the brand is still strong, if there’s consumer acceptance, if the unit economics are good and it has a point of differentiation, it can still work.”

Clearly, all of the chains mentioned started out with a strong enough brand to attract investment from franchisees, but their stories illustrate how quickly brand reputation can change.

If you’re a franchisee, do you worry about having to deal with similar troubles? Do you have a Plan B? Tell us in the comments.