Welcome to 2018. The future of franchising is upon us. What does the landscape look like? We don't have a crystal ball, but we can make some educated guesses based on what is happening around us today, and what is likely to transpire in the coming years.
President Obama has recently finished his second term in office. The Affordable Care Act has been absorbed by the many businesses it affects, and these businesses have learned to deal with the incremental costs through managing hours and taking price increases as the market allowed. Business owners have also adjusted to increased income and capital gains taxes, and have devised strategies to minimize the bite. After a few years of historically low interest rates and central banks pumping liquidity into the economy, inflation has begun to kick in, and this is now putting a lot of upward pressure on commodities. Operators who took advantage of the low rate environment to recapitalize their business are very happy that they did.
Based on our observations and projections, here's what we think franchising will look like in 2018:
"So," you ask, "what does this mean for me?" In a word: opportunity. No matter the path followed by the franchisor of your system, it is advisable to prepare yourself to take advantage of what the future holds.
What kind of actions should you take? First, take stock of your operations capabilities, financial resources, motivations and desires, and where you are in your own life cycle. Determine if you have what it takes to become 25 percent larger, 50 percent larger, 100 percent larger, or maybe even to aspire to be one of the mega-operators eventually. Remember, you'll be able to take advantage of opportunities only if you are properly prepared to do so. To achieve this kind of growth, you'll need to get your resources lined up:
On the other hand, you may be at a point in your own life cycle where you are ready to move on to something else, or even retire. Given the demand for franchised operations, there will be great opportunities for you to transfer your units into the hands of one of the growth-hungry operators. But first, you must be prepared:
Meantime, while you are thinking through your plans, put yourself in a position to recapitalize now. Irrespective of how you plan to take advantage of the franchise opportunities in front of you, operators should take advantage of the current rate and capital environment to lock up financing at historically low rates. As more lenders seek franchise loans, underwriting criteria are slightly more flexible, and interest rate hedges and swap position, which have prevented some borrowers from refinancing the past several years, will become assets in the future as rates rise. Don't let short-term closing and documentation expenses defer a recapitalization strategy. Use a professional advisor, contact multiple lenders, get the best deal, and cut your borrowing costs while you plan for your future.
Okay, so it's not yet 2018. But you know how fast time goes by, and 5 years will be upon us in no time. The groundwork for the future of franchising is being laid before us today, and it's up to us to figure out how to secure the maximum benefit from the eventual outcome. Take some time to ponder your situation and what you think the future of your franchise system is. Decide how this might affect you, and how you can position yourself to take advantage of the opportunities being created.
Dean Zuccarello, CEO and founder of The Cypress Group, has more than 30 years of financial and transactional experience in mergers, acquisitions, divestitures, strategic planning, and financing in the restaurant industry. The Cypress Group is a privately owned investment bank and advisory services firm focused exclusively on the multi-unit and franchise business for more than 22 years. Contact him at 303-680-4141 or firstname.lastname@example.org.
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