“If someone comes to us and we’re dealing with something that’s clearly noncompetitive, these groups can be very strong to work with,” he says. “Because they bring certain things to the table that other new franchisees cannot.”
It’s not just restaurant franchisees who increasingly look to diversify, says Ryan Zink, CEO of franchise sales firm Franchise FastLane. In retail, owners increasingly prefer to hold a mix of concepts that can range from massage chains to tree removal services (though few are brave enough to operate restaurants with other retail or service concepts, he adds).
Franchise FastLane most frequently pairs franchised concepts with former executives or other successful individuals looking to invest in their own businesses for the first time. Most spend between $150,000 and $600,000 per unit.
When weighing brand partners, Zink looks for the most “defensible” concepts that are positioned to last. His company has examined plenty of restaurant concepts, particularly emerging doughnut concepts, ice cream brands, and health-minded restaurants. But none have made it through his vetting process yet.
“Many of these concepts are two-dozen units or smaller. So you really need to look at the track record of the units they have open, the leadership, and, of course, some of the unit-level economics,” Zink says. “I think the salad space could be one that is going to be long-lasting, and it is defensible. It’s just whether or not someone wants to take on the challenge and be a pioneer.”
Jeff Kolton, a partner at private-equity firm Corlex Capital, says the most successful restaurant franchisees often become organically concentrated in a single brand at the start. That’s because they perfect the operation of their concept, which naturally puts them at the top of the list when another franchisee wants to sell or the franchisor looks to expand.
Still, most operators elect to diversify over time.
“We haven’t yet invested in an operator who was only in one system,” says Kolton, whose firm invests in franchised restaurant, retail, and service sectors. “Most of the top operators we talk to are in more than one system.”
As for the new and emerging chains looking to bring these franchisees into the fold, Kolton says they face one very big hurdle: Few can tout the sheer economic heft of the big quick-serve brands. “To get from 100 to 500 stores, the infrastructure has to be there, the flexibility and strategy have to be there. I’m not seeing the long-term strategy; I’m seeing short-term strategy.”
Indeed, big operators like GPS—which owns a total of 475 stores—have so far stayed away from fast casuals because of the scale issue. “To get to 250 or 300 units is much more difficult with fast casual,” Phillips says.