Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchise Brands Are Buying Their Own Franchisees Out
Transcript
- Lucas: So there's this quietly growing trend in franchising that I think flies under the radar for most people who aren't deep in the space: brands are starting to buy back their own franchisee-operated locations. Not just the underperforming ones — they're targeting the best ones. Luna: Right, I've seen headlines about Inspire Brands repurchasing Arby's and Jimmy John's units from big franchisees. But is that really a trend or just a few big moves? Lucas: It's more than a few. Franchise buybacks have been accelerating over the past few years. In 2025, we saw a record number of transactions where the brand — the franchisor — was the buyer. According to data from FRANdata, buybacks accounted for about 12 percent of all franchise resale transactions last year. That's up from roughly 5 percent five years earlier. Lucas: And it's not just the big public companies like Yum! Brands or Restaurant Brands International. Even mid-sized franchisors are doing it — brands with maybe 200 to 500 units — because the math can work in their favor if they pick the right locations. Luna: Before we get into the numbers — and I know you want to — I just want to acknowledge something. These conversations take a lot of research, and we deliberately keep this show ad-free because we think that makes the advice more honest. If these episodes have helped you think about a franchise deal more clearly, you can support that independence at buy me a coffee dot com slash fexingo. No pressure, just a link if it matters to you. Lucas: Yeah, that's exactly right. And on that note — let's get into why a brand would want to buy back its own franchise. The surface-level reason is usually: 'We want more control over the customer experience.' But the real driver is often unit economics. A franchisee might be earning a 20 percent return on invested capital at a given location. The brand, if it buys that location and operates it corporately, can sometimes earn a similar or even better return — while also capturing the full revenue stream instead of just the royalty fee. Luna: So the brand essentially cuts out the middleman — the franchisee — and takes the entire profit margin on that unit. But doesn't that create a conflict of interest? I mean, if a brand is going to compete with its own franchisees for the best locations... Lucas: That's the friction point. And it's real. Some franchisee advocacy groups have raised concerns that brands are cherry-picking the highest-volume stores for buyback, leaving franchisees with the lower-performing ones. But in practice, most buybacks are negotiated — the franchisee has to agree to sell. And for a multi-unit franchisee who's been in the system for 15 years, a buyback offer can be a tidy liquidity event. They can cash out at a multiple that might be higher than what they'd get selling to another franchisee. Lucas: Let's put some numbers on this. Say a franchisee owns five locations of a quick-service burger brand. Each store does about $1.2 million in annual revenue. The franchisee's EBITDA margin might be around 18 percent, so about $216,000 per store. The brand might offer 4 to 5 times EBITDA for those stores — that's roughly $4.3 million for the portfolio. The franchisee walks away with a check, and the brand now owns those five locations outright. Luna: And what does the brand do with them? Keep them corporate-run? Or eventually refranchise them? Lucas: Both. Some brands keep them corporate — especially in high-density urban markets where they want tight control. Others buy them back, clean up operations, improve margins, and then sell them again to a new franchisee at a higher valuation. It's a way to recycle units and improve systemwide performance. Yum! Brands has done this with KFC and Taco Bell units in certain markets — they buy underperforming corporate stores, fix them, and then sell them to franchisees. Luna: So it's almost like a real estate flip, but for operating businesses. That seems like a smart capital allocation move if you have the balance sheet for it. Lucas: Exactly. And the capital piece is key. Not every franchisor has the cash to do this. But the ones that do — often private equity-backed brands or large public companies — see it as a way to deploy capital at a higher return than, say, opening new greenfield units. Because when you buy back an existing unit, you already know the revenue profile, the rent, the labor market. There's far less execution risk. Luna: Let's talk about the franchisee perspective. If I'm a franchisee and a brand approaches me with a buyback offer, what should I be thinking about? Is it always a good deal? Lucas: Not always. The key question is: what's the alternative? If you're a franchisee in a system where the brand is aggressively buying back units, you might worry that your territory could be marginalized. But if you get an offer that values your business at a premium to what you could get on the open market — and you're ready to exit — it can be a great outcome. The tricky part is the tax treatment. A buyback is typically structured as an asset sale, so you could face capital gains taxes. But smart franchisees negotiate for a higher price to offset that. Lucas: There's also the question of what happens to the franchise agreement. Some brands include a right of first refusal in their contracts — meaning if you get an offer from a third party, the brand can match it and buy the units first. That's becoming more common. I've seen franchise agreements where the brand even has a unilateral option to buy back units at a formulaic price — usually based on a multiple of trailing earnings. Luna: Wait — unilateral? So the brand can force a sale even if the franchisee doesn't want to sell? Lucas: In some contracts, yes. It's usually triggered by specific events — like the franchisee's death, disability, or a material breach. But a handful of newer franchise disclosure documents include a 'right to purchase' clause that lets the brand buy the business at fair market value with no cause. That's controversial. The American Association of Franchisees and Dealers has flagged it as a potential red flag in franchise disclosure documents. Luna: So if you're a prospective franchisee, you should actually read the fine print on buyback clauses before signing. Lucas: 100 percent. And look at how the brand defines 'fair market value.' Is it based on an appraisal by an independent third party? Or does the brand get to pick the appraiser? That makes a huge difference. I've seen cases where the brand's appraiser came in at a lower multiple than what a franchisee could get from a private buyer. Lucas: But let's zoom out. The bigger picture is that buybacks are changing the power dynamic in franchising. Historically, the franchisee owned the business and the brand licensed the name. Now, more brands are treating franchisee locations as assets they can eventually reacquire. It's a shift toward a more asset-light model for the brand — but with the option to go heavy when it makes sense. Luna: And for franchisees, it creates a potential exit path that didn't really exist before — at least not from the brand itself. A decade ago, if you wanted to sell your franchise, you had to find another franchisee or a third-party buyer. Now the brand is an active buyer in the market. Lucas: Right. And that can actually increase the liquidity of franchise assets. If a brand is known to buy back good units, that can support higher valuations for franchise resales across the system. It's a signal that the brand has confidence in the unit economics. Luna: Are there any downsides for the brand itself? I mean, if they buy back too many units, they suddenly become an operator, which requires a different skill set than being a franchisor. Lucas: That's the classic tension. A franchisor's core competency is system design, brand marketing, and supply chain — not running day-to-day operations. When a brand buys back a bunch of units, they have to build a corporate operations team, deal with labor laws directly, manage local marketing. It's a different business. Some brands have stumbled because they bought back units but didn't have the management infrastructure to run them well. Lucas: Take the example of a large sandwich chain that bought back about 100 units in the Midwest a few years ago. They thought they could improve margins by standardizing processes, but they ended up with higher turnover and lower customer satisfaction because the corporate culture didn't translate as well as the franchisee's local touch. They eventually sold those units to a different multi-unit franchisee. Luna: So buybacks aren't a no-brainer. They require the brand to have operational chops. Which brings us back to the franchisee perspective — if you're selling to the brand, you want to make sure they actually know how to run the business, or your earn-out might not pay out. Lucas: Exactly. And that's why most buyback agreements include an earn-out period — typically one to three years — where the franchisee stays on as a consultant or operator to ensure a smooth transition. The franchisee gets paid based on the unit's performance post-sale. So it's in their interest to pick a buyer — even if it's the brand — that can sustain the business. Luna: So what's your take? Is this trend good for the franchise industry overall? Lucas: I think it's neutral to positive, with caveats. For the system as a whole, buybacks can improve unit economics and brand consistency. But it creates a two-tier system — franchisees who get bought out and those who don't. The ones who don't may feel like second-class citizens. And if the brand starts competing aggressively for the best locations, it could undermine trust. But if buybacks are done transparently and fairly, they're just another tool in the capital allocation toolkit. Lucas: One thing I'm watching: as more franchise agreements include buyback clauses, the FDD — the franchise disclosure document — becomes even more important to scrutinize. Prospective franchisees should look for any language that gives the brand a unilateral right to purchase, and they should understand how the price is determined. Luna: Good point. And I'd add: talk to existing franchisees about whether they've ever been approached with a buyback offer, and how it was handled. That's probably the best due diligence. Lucas: Absolutely. The franchisee grapevine is often more reliable than the FDD. Alright, I think that's a solid look at buybacks. Next episode, I want to dig into something I've been hearing more about — franchisee cooperatives, where franchisees band together to negotiate with the brand. That's a whole other power dynamic. Luna: I'm in. See you next time.