Small restaurant franchisees endangered?

Private equity firms and other large investors are taking over more and more franchised restaurants, contributing to a shift toward larger operators that may threaten the future of smaller and even medium-sized franchisees.

Franchise Times reported in 2015 that the country’s largest 200 restaurant franchisees operated over 23,000 restaurants, or an average of 116 units. Ten years ago, franchisees in the top 200 owned 78 units on average. In other words, the big restaurant operators have gotten bigger by nearly 50 percent over the period.

As larger operators grow, some smaller franchisees leave. Rick Ormsby, co-founder of investment bank NDA Inc., which specializes in the sale of YUM! Brands units (Taco Bell, KFC, and Pizza Hut) reports that 25-30 percent of YUM! operators with 10-15 units or fewer have left the system over the past four or five years.

Even medium-sized franchisees are losing ground, according to Franchise Times: “Many of the franchisees on the Restaurant 200 are getting bigger not by purchasing these mom-and-pops, but because they’re buying out mid-scale operators with 10 to 20 locations. These franchisees are retiring or simply getting out of the business.”

According to Nation’s Restaurant News, lenders are competing to make loans to larger franchisees, driving down the cost of loans. Meanwhile, some smaller franchisees are in a crunch. For example, McDonald’s owner/operators, who operate an average of only about four stores, may face higher borrowing costs because bond ratings agencies have cut McDonald’s credit rating to three notches above junk.

Other fast-food chains increasingly rely on larger franchisees to open new units and buy company-owned restaurants. For example, Burger King has given Carrols Restaurant Group first crack at buying company stores in a broad swath of the U.S. Carrols bought 46 more Burger Kings in the fourth quarter of 2015, giving it a total of 705 stores.

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