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In franchising, multi-unit operators know that not all locations perform equally. While some units consistently generate strong revenue and loyal customer bases, others struggle with declining sales, operational inefficiencies, inferior locations, and high employee turnover. These underperforming units present challenges and opportunities.
The path to long-term profitability and portfolio growth often involves strategic decision-making about struggling locations. The key lies in evaluating whether a unit has the potential for a turnaround or if it is better to close. Working closely with franchisors and leveraging operational expertise can help operators make informed choices and execute effective strategies. As multi-unit operators evaluate their networks, the first step is recognizing the root causes behind their underperforming units and whether a turnaround is feasible. Not all struggling locations are created equal; some have hidden potential while others may be beyond saving.
Declining sales trends, high employee turnover, and poor customer reviews are obvious red flags. Operational bottlenecks and failure to adhere to brand standards can signal trouble. Older stores that require significant CAPEX for renovations or equipment upgrades may pose an overbearing financial burden. In many cases with older brands, the trade area has evolved, and the brand or site is no longer relevant. If the site cannot be reasonably turned, efforts should be directed to closing ASAP.
Collaboration with franchisors is crucial. Many brands offer resources or incentives to help operators determine if a turnaround is feasible. By working with brands and landlords, a solution can often be reached.
For some multi-unit operators, underperforming units represent an untapped opportunity for growth. Acquiring struggling locations can be a strategic way to expand market share at a lower upfront cost than building a new store. Operators with scale can leverage existing staff training programs, lower cost structures, shared marketing strategies, and streamlined operations to turn around struggling units. Distressed sellers may offer attractive terms, allowing for flexible financing or reduced purchase prices. To keep a location open, franchisors might waive certain fees or contribute to remodeling efforts. Landlords can be helpful if a store has poor rebranding prospects.
Due diligence is essential. Review the unit’s financials thoroughly, including trends, P&L statements, lease agreements, and outstanding liabilities. Are there untapped customer segments, or is competition too fierce? Lastly, confirm what support the franchisor will provide through training, technology, or marketing assistance.
When structuring a deal, consider performance-based purchase agreements that tie part of the payment to the unit’s future success. How much will it cost to renovate or upgrade technology? Speak with trusted advisors to explore financing options, including loans, franchisor-backed funding, or third-party investors. Once you’ve committed to revitalizing a struggling unit, execution becomes key. A successful turnaround requires a well-rounded strategy focused on operations, marketing, technology, and cost control.
Start with an operational overhaul. Implement best practices across your locations to standardize processes and drive efficiency. Investing in staff training and leadership development ensures managers are equipped to execute your vision. Consider introducing performance-based incentives to motivate your team and align their goals with your own. On the marketing front, reintroduce the unit to the community with localized campaigns and digital outreach. Boost the store’s online presence by enhancing SEO, strengthening social media efforts, and streamlining online ordering platforms. Ultimately, improving the guest experience through service, operations, and an inviting atmosphere will foster repeat business.
Technology can be a game changer. Upgrading POS systems, integrating delivery platforms, and using AI-driven tools for scheduling and inventory management can improve efficiency and cut costs.
Lastly, focus on financial optimization. Renegotiate leases and supplier contracts, ensuring the best possible terms. Streamline operations to eliminate waste, and use your multi-unit buying power to reduce expenses on inventory and services.
If a turnaround isn’t feasible, selling the unit or closing the store might be the smartest move. When pursuing a sale, maximizing value requires careful preparation. Begin by stabilizing revenue, reducing operational inefficiencies, and improving customer satisfaction. A prospective buyer will want to see a unit on the upswing, not in freefall. Use data to highlight recent improvements and showcase the store’s potential.
Finding the right buyer is crucial. Consider marketing the unit to other multi-unit operators, new franchisees, or private equity groups. Franchise advisors can help broaden your reach and negotiate favorable terms. Timing the sale strategically can also impact the unit’s valuation. If the market is strong and the brand is performing well, holding off until the unit shows consistent financial improvement could result in a better sale price. However, if the unit continues to drain resources, selling sooner might free up capital for more promising investments.
Underperforming franchise units don’t have to be a liability; they can be an opportunity. The key is making informed decisions based on data, due diligence, and strategic planning. By identifying struggling units, assessing their potential, and collaborating with franchisors, operators can revitalize locations for profit, position them for a maximized sale, or close underperforming sites to reallocate resources to more profitable locations. Striking the right balance between acquisitions, operations, and exits will ultimately drive sustained portfolio growth.
Tori Wagner is a vice president with C Squared Advisors, an advisory firm that focuses on multi-unit franchisees and franchisors. She has worked with franchisees for more than a decade, advising clients through M&A transactions as well as raising debt and equity capital to support strategic initiatives. Contact her at 508-769-0097 or tori@c2advisorygroup.com.