Franchising, both domestically and abroad, represents a massive force driving economic growth. In 2023 alone, franchising output eclipsed $893 billion, with a rapidly growing trajectory that will likely see that number continue to grow in the coming years.[1] As with many of the industries seeing continued growth and success, the franchising industry has become increasingly in demand, with companies seeking to expand their footprint through mergers and acquisitions (“M&A”).[2] In particular, franchise systems have become sought-after targets for private equity companies.[3] While acquiring franchise systems can provide lucrative growth opportunities, the industry presents challenges unique from those of other sectors.
Franchising is a highly regulated industry governed by a multitude of federal and state laws regarding the relationship between the franchisor and the franchisee.[4] For eager investors and expanding companies, this complex legal framework can often be overlooked, overshadowed by the potential for massive financial gain achieved by either acquiring or merging with successful franchise systems. However, navigating this complex statutory and regulatory landscape is crucial for avoiding legal pitfalls that could significantly impact the success of the deal. New acquisitions are often followed by attempts to cut costs using a variety of strategies, one of which is terminating underperforming franchisees. In many states, investors are surprised to find that terminations are subject to a number of state-specific laws governing the relationship between franchisors and franchisees. Currently, twenty-three states have laws governing the relationship between franchisors and franchisees.[5] Franchise relationships are also subject to the vast array of contractual obligations established in franchise agreements.
Beyond compliance with existing laws and applicable contractual provisions, prospective stakeholders must also carefully consider the relationship dynamics between the franchisor and franchisees. Unlike typical corporate acquisitions, where a company owns and controls its subsidiaries, franchise systems involve independent franchise owners who operate their businesses under the franchisor’s brand. While franchisees within a given system use a common set of trademarks and are subject to standardized system standards and requirements, each franchisee is ultimately responsible for the successful operation of their locations.[6] Due to the more independent nature of franchisee operations, the success and satisfaction of these franchisees are essential for a successful franchise system. So, how can prospective investors maximize the success of a franchise system following an acquisition?
Strategies for Successful Franchise Acquisitions
Establish Clear Communication
One of the most important aspects of post-acquisition success is maintaining open, transparent lines of communication with franchisees. Franchisees, who are often independent business owners with significant investments, may feel uncertain or anxious about changes to the system. New ownership should immediately establish trust by holding open forums or meetings where franchisees can ask questions and voice concerns. Franchisee satisfaction is closely tied to franchisees’ perception of being heard by franchisors, which in turn affects overall performance and system growth. By being proactive in addressing concerns and outlining a clear vision for the future, new owners can mitigate potential disruptions and foster a positive transition. Trust is essential for franchisee buy-in, and clear communication builds that trust from the outset.
Engage in Collaborative Decision-Making
Allowing franchisees to have a seat at the table regarding important operational decisions can foster goodwill and system-wide buy-in.[7] This could involve establishing a franchisee advisory council, which offers a structured way for franchisees to collaborate with the corporate team. Some franchise systems also have independent franchisee associations, which can serve as valuable allies for franchisors if sufficient effort is put into developing successful relationships.[8] Research suggests that franchisee involvement and satisfaction lead to positive outcomes for the franchise system as a whole.[9] Collaboration with experienced franchisees can also benefit franchisors. Franchisees often have extensive experience with the success and challenges faced by the system, providing practical insights into the success (or lack thereof) of different initiatives.
Think Beyond the Numbers
In the rush to maximize profits after an acquisition, some investors focus heavily on increasing EBITDA (earnings before interest, taxes, depreciation, and amortization). While EBITDA growth is important, it’s equally critical to take a long-term view of the franchise’s value, particularly regarding brand equity and sustainability. Short-term cost-cutting measures, such as reducing marketing spend or increasing franchise fees, may boost immediate profits but can erode the brand’s reputation and the satisfaction of franchisees. Instead, new ownership should focus on investments that build the brand’s reputation, customer loyalty, and franchisee success over time.
A Tale of Two Acquisitions
The abovementioned points are showcased in two notable acquisitions within the franchise world. The first (Quiznos) serves as a cautionary tale, and the second (Popeyes), a playbook for success. These two acquisitions represent significantly different strategies for franchisee relations, resulting in two vastly different outcomes for each system. These cases also emphasize the importance of thorough due diligence prior to the acquisition of a franchise system. While financial statements and market trends provide necessary information for prospective investors, diligent investors and the lawyers who represent them can also learn invaluable information from those operating franchise systems at the ground level: the franchisees. As these case studies demonstrate, the success of a franchise system is inherently tied to the success of its individual franchisees.
Quiznos: The High Cost of Ignoring System Stability
In 2006, Quiznos became the target of a leveraged buyout (“LBO”) led by a private equity firm. At the time, Quiznos appeared to be a thriving franchise system with over 5,000 locations.[10] However, the LBO saddled the company with significant debt, creating a financial environment where short-term profit extraction and aggressive cost-cutting took precedence over franchisee success. Over the next decade, Quiznos’s mismanagement of its franchisee relationships and systemic neglect led to lawsuits, closures, and a collapse that serves as a cautionary tale for the franchising industry. While Greg Brenneman’s tenure as chief executive officer (“CEO”) saw briefly improved relations due to his dedication to improved communication, Quiznos’s management ultimately failed to meaningfully work with franchisees long-term.
Lack of Meaningful Communication with Franchisees
Quiznos’s corporate leadership, under the financial pressures imposed by private equity ownership, operated with a one-sided approach that created significant discontent among franchisees. Quiznos largely failed to engage with its franchisees in meaningful dialogue. Complaints about high food costs, driven by mandatory purchasing agreements with corporate-approved suppliers at inflated prices, were ignored.[11]
Over time, these unresolved issues fractured trust within the system, leading many franchisees to file lawsuits alleging fraud, breach of contract, and other claims. Transparent communication and a willingness to address franchisee concerns could have mitigated this crisis. Instead, the company’s silence and disregard for franchisee well-being amplified frustrations, destabilizing the system and tarnishing its reputation.
Failure to Involve Franchisees in Meaningful Decisions
Rather than fostering collaboration with franchisees, Quiznos imposed unilateral decisions that prioritized rapid revenue growth. The company pursued an aggressive expansion strategy, often saturating markets by placing new locations near existing ones.[12] This policy forced franchisees into direct competition, diluting individual store profits and further straining relationships between franchisees and corporate leadership.
Quiznos also failed to meaningfully engage franchisees in the decision-making process surrounding food suppliers. While many fast-food franchisors negotiate with vendors who then supply locations directly (at a reduced cost since they’re buying in bulk), Quiznos corporate bought all of its supplies from vendors and then sold them to franchisees, resulting in substantially higher costs. While this decision may have been Quiznos’s contractual right, it ultimately cut into the margins of franchisees, reducing their earnings and making it difficult to earn any meaningful profit.[13] Franchisees repeatedly requested a change in food sourcing to align with the industry standard preference for food co-ops, but Quiznos’s management held firm on its position.[14]
Quiznos also took an adversarial approach to independently forming franchisee associations.[15] Rather than seeing the associations as cooperative partners, the value of which has been seen in numerous franchise systems,[16] management refused to meaningfully work with the formed associations.
Short-Term Thinking, Long-Term Consequences
The LBO also led to policies that emphasized short-term financial gains over the system’s long-term health. High franchise fees and royalties, combined with costly operational mandates, placed significant financial strain on franchisees. These revenue-generation strategies temporarily improved Quiznos’s EBITDA but undermined the profitability of its operators, forcing many into financial distress.
Additionally, Quiznos reduced investments in franchisee support, such as training, marketing, and operational resources. These cost-cutting measures saved money in the short term but left franchisees ill-equipped to navigate challenges, further exacerbating their struggles. As closures became rampant and legal disputes mounted, Quiznos’s reputation with franchisees, customers, and the market deteriorated. By 2014, Quiznos filed for bankruptcy, with its store count plummeting from over 5,000 locations to fewer than 400.
Lessons from the Decline
Quiznos’s collapse underscores the dangers of prioritizing short-term financial metrics over system stability and franchisee well-being. Where Popeyes (discussed below) thrived by embracing transparency, shared decision-making, and long-term investments, Quiznos crumbled under the weight of mistrust, overreach, and shortsightedness driven by private equity pressures.
The disconnect between corporate executives and franchisees also cost millions in litigation and settlements. In 2010, Quiznos settled a class action with disgruntled franchisees to the whopping tune of $206 million.[17] Several other settlements have been reached with franchisees in the following years, resulting in the franchisor paying over $40 million in 2012 to a group of franchisees. Settlements have continued to be reached in franchise-related litigation as recently as 2020.[18] These massive awards and countless years of litigation illustrate the importance of working collaboratively with franchisees early to ensure effective communication and collaboration.
For investors in franchising, this case highlights the risks of ignoring the operational foundations of the business. A franchise system is only as strong as the trust between franchisors and franchisees. When that trust is broken, no amount of aggressive growth or cost-cutting can compensate for the damage. Quiznos serves as a powerful reminder that success in franchising depends not just on financial engineering but on the strength of the relationships that sustain it.
Popeyes: A Recipe for Post-Acquisition Success
When Cheryl Bachelder stepped into her leadership role as CEO of Popeyes Louisiana Kitchen in 2007, the brand was struggling. Once a celebrated name in the quick-service industry, Popeyes had stagnated. Franchisees were disgruntled, profits were underwhelming, and the relationship between corporate and franchise owners was fractured. Yet, what could have been a cautionary tale in franchise mismanagement became a textbook example of post-acquisition success—rooted in the earlier strategies of clear communication, collaboration, and a steadfast focus on long-term growth.
Rebuilding Trust Through Transparent Communication
One of Bachelder’s first priorities was to bridge the chasm of mistrust between the corporate office and its franchisees. Years of one-sided, top-down decision-making had left franchisees feeling unheard and undervalued—sentiments that significantly stymie franchise systems.[19] Bachelder turned the tide by establishing open forums, creating a space for franchisees to express their concerns and contribute ideas. This took multiple forms, one of which was conducting franchisee satisfaction surveys, something that the previous Popeyes ownership had declined to do.
Inviting Franchisees to the Table
Under Bachelder’s leadership, Popeyes took the bold step of embedding franchisee voices into the company’s decision-making process. By forming a franchisee advisory council, Bachelder ensured that operational strategies reflected the on-the-ground realities of franchise operations. Franchisees were invited to participate in high-level discussions about Popeyes’s strategy, particularly in discussions that directly impacted them, such as implementing a national advertising fund and increasing advertising contributions from franchisees.[20] By involving franchisees in the strategy and discussions, Bachelder was able to more effectively convey the overall vision for corporate strategies. This strategy was successful, with the franchisees agreeing to increase their advertising contributions and transition to a more nationally focused advertising effort.
While many franchisors reserve the contractual right to unilaterally increase advertising fees (subject to some limitations), practically speaking, this move often results in significant pushback from franchisees. The decision by Popeyes’s leadership to include franchisees in discussions helped earn their buy-in to corporate initiatives.[21] While franchisors oftentimes have the opportunity to make sweeping changes unilaterally under the language of their franchise agreements, the decision to include franchisees in the process results in greater collaboration, trust, and alignment between the franchisor and franchisees.
Shifting Focus from Quick Wins to Lasting Value
Rather than chasing short-term gains, Bachelder focused on fortifying Popeyes’s long-term value. She spearheaded initiatives that revitalized the brand, such as overhauling the menu, launching a Louisiana-themed marketing campaign, and introducing operational improvements. Perhaps most crucially, she restructured the financial relationship with franchisees, ensuring their profitability and encouraging reinvestment. These measures reflect a core principle explored in this paper: while immediate profitability may tempt new owners, sustainable growth demands thoughtful investments in the brand, franchisees, and customers alike.
Achieving Success Through Collaboration
The results of Bachelder’s strategy speak volumes. Over seven years, Popeyes experienced a dramatic resurgence in franchisee satisfaction, profitability, and market share. These more intangible improvements were reflected in the company’s financials as well. When Bachelder took over in 2007, Popeyes’s share prices were approximately $16.[22] In 2017, when Popeyes was acquired by Restaurant Brands International, the share price had grown by a whopping 388 percent.[23] Restaurant Brands International ultimately ended up paying $1.8 billion to acquire the franchise system.
A collaborative approach with franchisees also reduces the chances of burdensome litigation from displeased franchisees following an acquisition.[24] For investors hoping to eventually profit off the sale of the franchise system later down the road, reducing the footprint of franchisee litigation within the system can lead to a more attractive valuation.
Bachelder’s journey at Popeyes underscores the lessons explored in this paper: post-acquisition success requires more than financial acumen—it requires building trust with franchisees, inviting collaboration at all levels of the franchise system, and balancing short-term financial demands with long-term aspirations for growth. For prospective investors in the franchising industry, Popeyes offers an invaluable case study on how to revitalize a system and secure enduring success in a competitive landscape. It proves that satisfying franchisee stakeholders and increasing company value aren’t mutually exclusive but rather deeply intertwined.
Conclusion
In the competitive and highly regulated franchising landscape, prospective investors must approach potential acquisitions of a franchised system with a nuanced understanding beyond mere financial metrics. The complexities of franchise laws and the intricate relationships between franchisors and franchisees demand a strategy that accounts for the vast array of franchising laws and regulations and strikes a sustainable balance between short-term financial success and long-term system growth. Successful integration of a franchise system hinges on more than just optimizing EBITDA; it requires fostering franchisee trust, ensuring collaborative decision-making, and making thoughtful investments that enhance brand equity and operational sustainability.
By recognizing the unique dynamics of the franchise model and addressing them with transparency and foresight, investors can position themselves to achieve sustained growth, brand loyalty, and enduring success in a rapidly expanding industry. Ultimately, those who recognize and prioritize franchisee engagement and success are not only going to be better positioned to comply with franchise laws and applicable contractual obligations, but they’re also more likely to realize more sustained financial growth within the system. A thriving franchise system is built on thriving franchisees—those who understand this simple truth are poised to turn their investments into enduring success stories.
Ashley Rogers, Jin Qi & Khadija Cochinwala, 2024 Franchising Economic Outlook (Int’l Franchise Ass’n & FRANdata Feb. 14, 2024). ↑
Alan R. Greenfield, Christina M. Noyes & Sherin Sakr, Presentation at the Am. Bar Ass’n 40th Annual Forum on Franchising: Mergers & Acquisitions: The Basics for Buying and Selling the System (Oct. 20, 2017). ↑
Id. ↑
Fundamentals of Franchising (Rupert Barkoff, Joseph Fittante Jr., Ronald Gardner Jr. & Andrew Selden eds., 4th ed. 2015). ↑
Id. ↑
Fundamentals of Franchising, supra note 4. ↑
Andrew Beilfuss, Ronald K. Gardner Jr., Eric H. Karp, Brenda B. Trickey & Kate B. Ward, Presentation at the Am. Bar Ass’n 47th Annual Forum on Franchising: Multiple Voices at the Table: Effective Franchisee Associations and Franchise Advisory Councils (Oct. 16, 2024). ↑
Greenfield et al., supra note 2. ↑
Fundamentals of Franchising, supra note 4. ↑
Katie Porter, What Happened to Quiznos? 4,000+ Closures—but There’s Still Hope, 1851 Franchise (updated Jan. 13, 2023). ↑
Jonathan Maze, A Brief History of Quiznos’ Collapse, Rest. Bus. (June 13, 2018). ↑
Keith Donovan, What Happened to Quiznos? (A Franchisee Hellscape), Startup Stumbles (Apr. 9, 2024). ↑
Jason Daley, Why These 3 Once Thriving Franchises Have Fallen on Hard Times, Entrepreneur (Aug. 6, 2014). ↑
Jonathan Maze, Has Quiznos Changed?, Franchise Times (updated Nov. 24, 2020). ↑
Id. ↑
Fundamentals of Franchising, supra note 4. ↑
Janet Sparks, Quiznos Settlement Finalized, Among Highest Penalties in Franchising, Marks & Klein LLP (Aug. 17, 2010). ↑
Beth Ewen, Leading Plaintiff Settles in Quiznos Lawsuits, Franchise Times (updated Oct. 12, 2020). ↑
Beilfuss et al., supra note 7. ↑
Cheryl A. Bachelder, The CEO of Popeyes on Treating Franchisees as the Most Important Customers, Harv. Bus. Rev. (Oct. 2016). ↑
Id. ↑
Popeyes Louisiana Kitchen, Inc. (PLKI) Stock Price History, Macrotrends (last visited Nov. 22, 2024). ↑
Id. ↑
Kirk Reilly, L. Seth Stadfeld & Phillip Leslie Wharton, Presentation at the Am. Bar Ass’n 29th Annual Forum on Franchising: Litigation After Acquisition of a Competing Franchise System (Oct. 11–13, 2006). ↑
