Written by: Jeff Elgin
Date: July 29, 2011<
The market is still buzzing with the news of Dunkin' Donuts recent initial public offering. The franchise's aggressive growth plans combined with allure of its delicious goodies have driven up the stock price since the initial offering a few days ago. These are indeed exciting times for the owners of the company.
Now the rumors are swirling around the Subway chain. Some of its recent actions in not renewing a few regional developer contracts have led some to speculate it might be dressing up the company for an IPO of its own. Could it be that Fred DeLuca, the founder of Subway, is ready to cash in some of his chips? He certainly wouldn't be the first to do so and the payoff would be huge.
There's no way to know for sure whether Dunkin's stock will continue to rise or if Subway will join them as a public company. Even though the future isn't certain, these situations do give us the opportunity to discuss an important question: Is a change in the ownership structure of a franchise company good or bad for the franchisees?
A change in ownership doesn't automatically mean that there will be changes that affect the franchisees, but that's usually what ends up happening. You can count on one thing: The owners of the individual franchise units at Dunkin' and Subway are paying close attention to the news and watching these companies carefully to see if and how any ownership changes are going to affect them.
In my view, you don't have to look further than the Burger King chain over the past 20 years to see why. Multiple ownership changes led to multiple senior management changes which led to multiple marketing and operational system changes. The franchisees were stuck in the middle of all these and basically left to hope that it would work out for the best. It's clear to me that this sort of periodic chaos is bad for any franchise system and the average unit results typically reflect this fact.
What's more, an ownership change can sometimes create a short-sighted focus on reducing expenses as a way of increasing reported profits. Cutting wasteful overhead is fine but if the new owners slash support staff and services too deeply it might also reduce performance at the unit level. That kind of approach doesn't benefit anyone in the long term.
McDonald's was an example of a franchise that went public to create advantages for the system and provide substantial benefits for the franchisees as well as for the company's owners. The huge growth of the system in the 1970s and 1980s was fueled in no small part by its ability to purchase the land and buildings for their new stores with capital provided through the public markets. The company has been consistently managed in a manner that eliminates the potential negative impacts that could come from being a public company and that's a big reason for its continued success.
There have been many other examples of franchise companies that used ownership changes to accomplish positive results for their franchisees. These changes are sometimes in the form of an IPO but far more often involve bringing in new investors or private-equity companies to join forces with the current owners.
There have been many other examples of franchise companies that used ownership changes to accomplish positive results for their franchisees. These changes are sometimes in the form of an IPO but far more often involve bringing in new investors or private-equity companies to join forces with the current owners.
Roark Capital Group, a private-equity group based in Atlanta, is one example of this dynamic. Over the past few years it has purchased a major interest in more than franchise companies, including such well-known brands as Arby's, Carvel, Cinnabon, and Money Mailer. It typically works closely with the existing management group to determine what additional assets can be provided to the company to foster growth for the franchisees. This focus on increasing the success of the franchisees as the foundation for growing the franchise system has helped it achieve strong and consistent growth across its many brands.
This is the secret to making an ownership change become a good thing for the franchisees. In franchising, the success of the company is ultimately dependent on the success of the individual franchisee. If the new ownership group is focused on achieving its goals by making the franchisees more successful, the outcome is much more likely to be positive for all involved.
