Tucker ruled that the debtor in the
case, Kazi Foods, could not assume or
assign a franchise agreement without
the approval of the franchisor. (See Kazi
Foods of Michigan, Inc., 11-43971.)
As a result, potential new franchisees
may need to commit significant funds
for a franchisor’s plan to refurbish
facilities and maintain brand standards
as part of their approval process.
Sales in the franchise industry will
be impacted significantly because
Tucker’s decision may negatively
affect what a buyer is willing to pay for
a group of stores, which in turn will
impact a seller and perhaps the lending
institutions that financed the seller.
David Bagley, CTP, is a principal with MorrisAnderson
and leads the financial and operational advisory firm’s
franchise industry practice group. He has more than
20 years of experience assisting financially distressed
and underperforming companies. Bagley is a graduate
of the J.L. Kellogg Graduate School of Management
at Northwestern University and DePauw University.
locations can have a real dollar impact
on values and potential recovery
in a sale or downside scenario.
Buyers will look for good value for
the operating units, net of the need
for new capital expenditures, while
franchisors will insist on funds being
set aside or commitments made for
the remodeling as part of financing
packages. The difference will have to
come out of equity or potentially result
in discounts to par for the lenders.
invest in capital improvements
should continue to thrive. Those like
Chipotle that do not depend on free-standing specialty buildings and can
therefore open stores with nominal
upfront capital should also prosper.
Franchisors that are trying to assist
their partners by providing financing
and incentives should also do relatively
well in the upcoming years.
For lenders to the franchise community,
the lack of appropriate spending
on remodeling and refurbishing
Over the last three years, the stabilization
of revenues in the restaurant industry
has enabled companies to maintain
their profitability. However, heading into
2012, the inconsistent manner in which
capital expenditures have been made
throughout the industry will have a major
impact on profitability going forward.
Companies that sit and wait for the tide
to turn, however, may soon find out that
they have been left very far behind. J
Companies like McDonalds that have
been profitable enough to consistently
More than working capital. Thinking capital.
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