Is the pandemic the right time to invest in a restaurant franchise?

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I recently read an article assuming that this coming year will be one of the strongest times on record for the franchise because of (not despite) COVID-19. So is it possible that next year will be the best year for franchisees? This kind of speculation is reckless. However, it’s fair to say that franchises are relatively large investments in restaurants during the COVID-19 pandemic.

Decline and rebound in restaurants

There is no sugar coating – COVID-19 has absolutely ravaged the restaurant industry as a whole. The National Restaurant Association said the restaurant industry lost $ 120 billion in sales in March, April and May collectively, and that amount is expected to double by the end of 2020. Although the bulk of that loss has been absorbed into full-service restaurants, fast-serve were not entirely spared.

While restaurant chain transactions were down 43% year over year in the week ending April 12, early June, when the majority of restaurants had reopened to some extent , the chains at the table had recovered a decrease of 30%. Year after year. Fast-service chains had recovered to show only a 13% year-over-year decline. Some counter service franchises even recently reported positive year-over-year sales during the pandemic. After experiencing a first hit on sales, A&W Restaurants reported sales were up double digits, Papa Johns noted a 24 percent increase in sales in North America and Popeyes bragged that sales had increased by “very high 20%”. While full services have generally not rebounded as quickly, there is also some positive news for the industry, with some franchises reporting that sales are returning to normal, such as Outback Steakhouse, which notes that its reopened locations have recently approached the 90 percent of business before the pandemic.

Benefits of the franchise

So what makes franchises better suited than independent restaurants to survive and even be seen as a relatively attractive investment in the midst of a pandemic? Franchises tend to have a solid and proven infrastructure to help franchisees adapt as needed to survive and succeed in tough times. For example, a franchisor can quickly develop and help implement technologies such as online ordering systems, push the expansion of business channels to include takeout and delivery, and implement payment processes. contactless in an accelerated manner. These adjustments have proven to be absolutely critical during the pandemic with the boom in sales using these services as dining room seating has been discontinued or downsized – and as independent restaurants may struggle to change their operating procedures. and to implement new technology in such a rapid timeframe. manner.

Domino’s is an excellent example of a franchise system benefiting its franchisees. Domino’s reported a 20.9% year-over-year increase in comparable store sales between April 20 and May 17. Part of this increase can likely be attributed to Domino’s corporate shift to a 100% contactless model nationwide. This was a massive change in operating procedure that happened over a period of several weeks, which the franchise concept allows to happen.

Despite all the negative effects the pandemic has had on the restaurant industry, it has also created unique franchise investment opportunities. Some franchisors have reduced their royalty rates to encourage continued franchise sales. Some existing franchisees may be flustered by the effect of the pandemic on their operations and seek an exit, which, coupled with declining sales, can open the door to potential acquisitions at favorable prices. Landlords can find themselves in a difficult position due to defaults and difficulty collecting rent from their existing tenants, which can give franchisees stronger negotiating power over their lease (s). In addition, the potential employment pool is large with many layoffs and holidays (especially in the service sector), creating a solid base on which to draw for new franchisees. Finally, there will inevitably be less competition from permanently closed restaurants.

Steps to invest

If you are looking to become a franchisee or expand your franchise portfolio, your first step should be to identify the concepts that you think are right for you and that allow you to successfully manage the challenges posed by this pandemic.

Whether you choose to develop new locations or purchase existing locations from the franchisor or existing franchisees, there are a host of legal and documentation issues to resolve with the franchisor, including reviewing the franchise disclosure document. (“FDD”) and the franchisor’s franchise agreement. , which should list all potential expenses, fees and restrictions imposed by the franchisor on the franchisee. While franchisors don’t like to deviate from their standard franchise agreements, it’s certainly possible that franchisees now have more bargaining power than they did before.

If you decide to buy an existing portfolio from another franchisee, in addition to the relationship with the franchisor, the process also involves negotiating, documenting and closing the purchase transaction with the existing franchisee. An experienced franchise lawyer can greatly assist you in your review and digestion of the FDD and the franchise agreement, as well as in your negotiations with the existing franchisor and / or franchisee.

Conclusion

While no one can tell you for sure that next year will be the best year ever for franchisees, the ability of franchises to adapt quickly to survive, recover and even thrive in tough times, as well as Today’s unique benefits and investment incentives present an intriguing opportunity to explore the possibility of becoming a franchisee or expanding your existing franchise portfolio.

Brian R. Tunis is a member of the Commercial Transactions group at Trenam Law in Tampa. He represents buyers and sellers in the sale and financing of franchises and other businesses. He can be contacted at btunis@trenam.com.


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