Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Are Buying Competitor Locations
Transcript
- Lucas: The most efficient way to grow a franchise portfolio today isn't opening a new unit. It's buying the one next door that just went under. Luna: That sounds aggressive. Are you talking about outright purchase or just taking over the lease? Lucas: Usually it's both. You acquire the physical location and the customer base, but you do it through a lease assignment rather than a full build-out. In October 2026, with construction costs still twenty percent above pre-pandemic levels, skipping the build is the single biggest margin protector for new multi-unit operators. Luna: But doesn't the franchisor have approval rights on who operates the site? That could kill the deal instantly. Lucas: It can, which is why most deals start with a letter of intent signed by the seller and the landlord before you even talk to corporate. The landlord wants vacancy gone. They will pressure the franchisor to approve you if your financials look solid and your track record is clean. It’s less about brand purity and more about continuity of rent payments. Luna: So the power dynamic shifts from the brand to the property owner? Lucas: Exactly. And this brings us to something we should mention quickly because it keeps these conversations going. If these discussions help you make smarter moves in your own business, consider supporting the show directly. It helps us keep producing deep dives like this without ads. You can find us at buy me a coffee dot com slash fexingo. Thanks for keeping the lights on. Luna: Right. So back to the mechanics. What happens when you actually step into that existing store? Lucas: You inherit a mess, usually. Or you inherit a goldmine hidden under bad management. I’m looking at data from a mid-sized quick-service restaurant group where three consecutive franchisees failed in the same strip mall. The last one left because they couldn’t staff. The unit itself was perfectly viable. Luna: How do you tell the difference between a staffing failure and a structural failure? Lucas: Look at the gross margin history. If the margins were healthy until the last six months, it’s operational. If the margins were thin from day one, it’s the concept or the location. For the staffing case, you buy the location cheaply because the seller is desperate. You then install your own management team and immediately see the cash flow rebound. Luna: That feels risky. How do you verify the gross margin numbers without seeing their books? Lucas: You ask for the profit and loss statements for the last twenty-four months. Most sellers will provide redacted versions. You’re not looking for net income yet; you’re looking for food cost percentages or labor cost percentages. If those metrics are stable while revenue dips, you know the core product works. Luna: And if the revenue has been flat for two years? Is that still worth buying? Lucas: Only if the rent is below market. This is where the lease assignment becomes critical. When you take over an existing lease, you lock in the historical rent rate. If you open a new unit nearby, you pay current market rates, which are significantly higher right now. Luna: So the arbitrage is essentially time-based. You get older terms in a newer economy. Lucas: Precisely. But there is a trap. Many commercial leases have clauses that allow the landlord to increase rent upon assignment if the new tenant is perceived as riskier. You have to negotiate a 'no escalation' clause tied specifically to the assignment event. Luna: That seems like a standard negotiation point. Do landlords usually agree? Lucas: They hesitate. They want to reset the value. But if the previous tenant defaulted or closed abruptly, the landlord is terrified of another vacancy. They will often waive rent increases just to get a credit-worthy operator in place immediately. Luna: What about the equipment? Can you just walk in and use what’s there? Lucas: You can, but you shouldn’t assume it’s in good shape. Franchisors often require specific certified equipment. If the previous owner used cheaper, non-compliant gear, you might need to replace half the kitchen just to pass inspection. Luna: That adds unexpected capital expenditure. Does that eat up the savings from the lower rent? Lucas: Sometimes. That’s why you bring in a third-party inspector during due diligence. It costs a few thousand dollars but saves you tens of thousands in surprise repairs. You also check the HVAC systems and grease traps. Those are the silent killers of franchise profitability. Luna: Grease traps? Really? Lucas: Seriously. A clogged or illegal grease trap can shut you down for weeks. The previous owner likely deferred maintenance to save cash. You need proof of regular cleaning logs before you sign anything. Luna: So documentation is as important as the physical assets. Lucas: It is. You also need to verify that the seller hasn’t promised any verbal incentives to customers or suppliers that you’ll be stuck honoring. Sometimes they promise a discount period that extends beyond the closing date. Luna: How do you protect against that? Lucas: You include indemnification clauses in the purchase agreement. If a supplier comes after you for unpaid invoices or unfulfilled promises, the seller is liable. It puts the burden back on them to clear the slate. Luna: That makes sense. But what about the staff? Do you keep the existing employees? Lucas: Rarely. The best employees usually left with the previous owner. The ones staying are often those who couldn’t find work elsewhere. You have to decide if you want to carry that baggage. Luna: Or if you can turn them around. Some managers stay loyal even after a change in ownership. Lucas: True. If there is one strong manager left, that’s a huge asset. You retain them with a retention bonus and give them equity in the new venture. That stabilizes the transition and keeps customers happy during the handover. Luna: Equity in a single unit though. How does that work structurally? Lucas: It’s usually a separate LLC for each location. The manager gets a small percentage, say five to ten percent, tied to performance metrics. It aligns their interests with yours without diluting your control too much. Luna: Is this strategy legal under all franchise agreements? Some brands forbid intra-territory competition. Lucas: This is the biggest legal hurdle. You must review the franchise disclosure document carefully. Some brands explicitly prohibit acquiring competitors within a certain radius. Others are silent, which creates ambiguity. Luna: Ambiguity is dangerous. How do you mitigate that risk? Lucas: Get a written waiver from the franchisor before you close. It takes time, but it prevents them from suing you later or terminating your license. It’s better to spend six weeks negotiating than six months in litigation. Luna: Six weeks is a long time in business. Why does it take so long? Lucas: Because corporate legal teams move slowly. They need to vet your background, your finances, and your proposed operating plan. If you present a professional package upfront, you can speed it up to two weeks. Luna: So preparation is key. What else goes into that package? Lucas: A detailed marketing plan showing how you will maintain brand standards while integrating the new location. You need to prove you won’t cannibalize their existing sales. Paradoxically, you have to convince them that your growth helps them. Luna: By increasing overall brand presence and economies of scale? Lucas: Exactly. More volume means better pricing from suppliers. You can offer the franchisor a portion of those supply chain savings to sweeten the deal. It turns a potential conflict into a partnership. Luna: That’s clever. Using supplier leverage to win internal approval. Lucas: It’s a powerful tool. Most franchisees don’t think about collective bargaining power. They operate in silos. Consolidating locations gives you voice. Luna: Does this approach work for service franchises too, or is it mostly retail? Lucas: It works exceptionally well for services like cleaning or landscaping. You buy the client list and the routes. Real estate matters less, but territory rights matter more. You need to ensure you aren’t stepping on another franchisee’s toes. Luna: Territory conflicts sound like a nightmare. How do you map that? Lucas: You pull the geographic boundaries from the original franchise agreement. You overlay them on a GIS map. If there’s overlap, you negotiate a fee-sharing arrangement with the neighboring franchisee. It’s messy but solvable. Luna: Fee-sharing instead of fighting. That sounds like mature business behavior. Lucas: It has to be. These are local businesses. You live here too. Burning bridges with neighbors hurts everyone. Collaboration often yields higher returns than confrontation. Luna: So the mindset shift is from competitor to partner, even among rivals. Lucas: Yes. And that starts with how you view the acquisition. It’s not just buying a building. It’s buying stability and market position. Luna: Stability in a volatile market. Lucas: Always. Especially now, when interest rates are making new construction expensive. The smart money is already moving into existing assets. Luna: Where do you think this trend leads in the next two years? Lucas: I think we’ll see more regional consolidations. Smaller operators banding together to buy larger distressed portfolios. It’s the natural evolution of the market. Luna: Consolidation creates efficiency but reduces variety. Lucas: It does. But it also raises the bar for quality. Only the best-run units survive the acquisition process. It’s a filter for excellence. Luna: A harsh filter, but an effective one. Lucas: Indeed. The question is whether you have the resilience to pass through it. Luna: And if you do, what’s the reward? Lucas: Control. And the ability to shape your local market instead of just reacting to it.