We began work with Dunkin’ franchisees over 30 years ago. We have grown up together. Our community of achievers has reaped the personal and professional rewards from hard work, dedication to growth, attention to detail and clear intent. But pressure from regulatory changes and higher operating costs have weighed on the entire community. Beyond labor shortages and rising wage pressure, franchisees are facing choking government intrusion into the ordinary course of business. Construction costs and mandated store upgrades are eating into the bottom line. A change in brand ownership has created an uncertain future, even as Dunkin’s appetite for small network franchisees has waned, leading to unwanted and painful exits from the system.
We see first-hand how these challenges are pushing bedrock franchisees to the brink. Superior generational network owners are giving up on the system. The good news is, store values remain high and the passing of the baton, while hard, is often accompanied by a sigh of joy and relief.
For franchisees considering an exit, we offer a guide on how to best position your network for sale on optimal terms.
The Network Health Checkup
The essential first task is a “network health check. Examine all network leases and franchise agreements to assure at least 10 years (preferably more) of remaining term. Term is “king.” Without it, value is diminished, and one is left at the mercy of the franchisor and the landlords to realize maximum value. Put the petal to the metal as follows:
1. Keep your plan to sell confidential.
2. Approach landlords before offering the network for sale to secure additional options to renew and/or term extensions.
3. Determine what leases require landlord consents to transfer. As part of the extension process, try to eliminate or ease the consent requirement. If a current term extension is required to get a consent concession, then do it.
4. Make sure lease extensions align with franchise expiration dates.
5. If and when lease term is obtained, approach the franchisor to align the franchise term with the lease. Money spent here will be recouped from a higher purchase price.
If you jump the gun without taking these steps, the sale process will be mired in delay from the buyer’s demand for lease term extensions performed under the gun. You bear the risk that a landlord will erect roadblocks or demand compensation for consenting to a transfer.
Do not forget that Allied Domecq, the conglomerate that purchased the Dunkin’ brand in 1989, claimed it owned the excess value created from a franchise-term extensions. This policy could rear its ugly head again.
Brokerage assistance
Should you obtain the assistance of a qualified broker to market the network for sale? We believe there are benefits to having a sales professional working on your behalf, particularly because buyers in the Dunkin’ system buyers now tend to be large, existing franchisees or multi-branded private equity firms. A broker can assure the network is priced properly according to current market conditions and the network’s health so you aren’t leaving money on the table. A broker can also create a market for your network, giving you the advantage over finding just one interested buyer, as well as serve as a buffer between you and the buyer— moderating unforeseen issues and suggesting creative solutions. A broker can help assess the buyer’s ability to perform.
Franchisees using a brand-experienced broker often receive a premium sale price and enjoy a less stressful transaction.
Dealing With the Dirt
For those franchisees employing foresight to purchase store-related real estate, there is an opportunity to reap long-term triple net income aside from the purchase price. If you will own and lease the dirt then consider these points:
• Secure initial term mirroring the existing franchise term (preferably 20 years or as close thereto).
• Set initial base rent at or near annual sales times the agreed percentage rent rate. If your store is doing $1.5 million of sales and if the percentage rent rate is 10%, set your initial base at or near $150,000. This insulates the revenue against the buyer opening nearby locations.
• Provide for periodic base rent increases, preventing erosion from inflation.
• Penalize the tenant for late payments.
• Assure good insurance coverage is in place to restore the building after a casualty occurrence.
• Set reasonable controls on whether tenancy transfers, assuring good business experience and reputation and financial capacity.
• Obtain personal guarantees from the buyer’s principals. Review their personal financial statements.
• If multiple leases are made then “cross guarantee” the leases to discourage selective site exits.
The Dotted Line
Before signing a letter of intent have it reviewed by your attorney and CPA. You must ensure the letter clearly defines potentially contentious points in advance, e.g. responsibility for deficiency costs, transfer fees, extra term cost and the like. The letter should clearly spell out essential terms of seller-held leases, including base rent percentage rent rates, requirement of personal guarantees of buyer principals. Your CPA will project expected tax liabilities and give input on the offer’s quality.
Show Me the Money
If leased real estate has related mortgage debt, confer in advance with your lender to assure that debt can remain in place after asset-based debt is paid. You may elect to pay off the real estate debt from store proceeds. If you prefer to keep the debt in place, then address this in advance.
We are not encouraging franchisees to exit the Dunkin’ system. Typically, ongoing revenue from store operations will exceed investment return from net proceeds. But if you believe now is time to say goodbye, we encourage you do so in a smart and measured way with the help of a team of qualified professionals. And remember, when one door closes another can open to new opportunity.
Louis Sousa and Sandra Sousa-Marujo provide a full suite of legal services to the Dunkin’ franchise community. They can be reached at 401-274-0600, or by email: lasousa@sousamarujo.com or ssousa@sousamarujo.com.
