In the world of franchising, we often emphasize the process of developing a franchise concept. We take you from the ground up, discussing the legal aspects of franchising, branding requirements, and operational and training systems that will frame future franchise units. Then, it’s time to attract those high-quality franchisee prospects, and you’re off to the races. It’s undeniable that these stages are critical for building a strong franchise network, which may include granting franchises to “franchise flippers.”

A somewhat unknown but long-standing practice, franchise flipping has continued to grow in popularity across different categories. Rather than follow the traditional owner-operator approach, franchisees who follow this strategy are focused on developing or purchasing a location with the ultimate goal of selling it at a higher valuation.

Today, we’re discussing the ways this strategy has evolved and highlighting the many reasons why franchise flipping continues to offer great opportunities.

Welcome to Franchise Flipping

As it sounds, franchise flipping involves developing or acquiring a franchise unit with the intention of improving its performance and selling it for an increased market valuation. Franchise turnarounds have been around as long as the franchise industry itself. Significant expansion in the franchise industry has made the phenomenon even more apparent.

Given its history, it’s important to keep in mind that franchise flipping is not an ongoing trend, nor is it a “get rich quick” scheme. Instead, it operates as a strategic investment where individuals can realize the full potential of scalable opportunities.

In practice, a franchise flip can seem simple. It begins with the unit itself. Either a flipper will develop a new unit from scratch or purchase an existing, typically underperforming, unit. From there, the franchisee will begin addressing performance gaps.

This step can involve remedying operational inefficiencies, including optimizing day-to-day procedures and improving consistency in services and products. Other areas might be centered on achieving higher profit margins, whether that means reducing the cost of goods sold, optimizing labor needs, or fine-tuning the overall pricing structure. It may also involve upgrading internal software systems, promoting strong employees, incorporating stronger brand guideline adherence, or increasing local marketing campaigns.

Once areas of improvement have been implemented and revenues have stabilized, a franchise flipper will then move to sell the unit for a profit.

The Investor Mindset

In some cases, this simplified three-step process can take a matter of months. In other cases, it may take a number of years. Whether a short-term or long-term strategy, franchise flipping has evolved into a sophisticated investment strategy where individual franchise units become critical components to the overall portfolio, similar to real estate development or private equity. Finding success when flipping a franchise takes an investor mindset to fully actualize the complete enterprise value of the acquired assets.

There are several forces propelling the investor mindset in franchise turnarounds. Like the franchise industry in general, one of the primary drivers in this secondary market activity is lower risk. Rather than establishing an entire system and brand, franchising provides a proven, replicable, and successful business model. Though franchise flipping can begin with constructing a new unit, it can also lower the barrier of entry further when a flipper purchases an existing unit, complete with assets, staff, and local presence. Many franchise investors prefer incorporating cash-flowing franchises, rather than developing units from scratch, into their portfolios.

Along the same lines, skilled franchise investors rely on thorough, data-driven research before signing the dotted line. When it comes to investing capital in flipping a franchise, these individuals often prefer working with predictable assets where the path to stronger returns seems tangible and reasonable given the current pain points of the unit(s).

So what categories are leading the charge in terms of franchise flipping? While your first thought might be restaurants, you may be surprised to learn that home services, such as HVAC, plumbing, restoration, and cleaning, present some of the strongest opportunities due to their needs-based and recession-resistant qualities.

Recent growth in the health and wellness category has also presented strong opportunities for franchise flipping. In these cases, an investor can take advantage of the consumer trend for prioritizing well-being through Pilates studios, cryogenic therapies, chiropractic clinics, vitamin shops, and other personalized health services.

Even B2B services such as commercial cleaning, staffing, and shipping centers have demonstrated steady, recurring revenue streams coupled with low overhead expenses, making them incredibly attractive in the flipping space.

How Should Franchisors Feel About the Franchise Flip?

So far, we’ve addressed the motivations and strategies of the franchise flipper. But what about the franchisor? While these transactional investments are incredibly opportunistic at the franchisee level, can the same be said for the parent company as a whole?

At its core, franchise flipping is devoted to improving underperforming stores. When investors purchase one or multiple units and undertake the process of optimizing operations, they strengthen the overall health of the franchise network. Nothing is better for the franchisor than locations that drive high profit margins, embody next-level customer service, and deliver according to brand standards. Similarly, flipped franchises naturally attract other prospective franchisees looking to acquire a unit with systems sculpted for success.

Though the benefits can be significant, there are reasons a franchisor may pause before approving the takeover of a franchise flipper. In some cases, a prospective flipper might not be the ideal fit for a specific franchise concept, whether it's a cultural misalignment, conflicting goals, or unfavorable investment approaches. In some cases, it might be that a franchise territory has experienced too much turnover in recent years, leading a franchisor to deny a flipper from taking over at a given time.

Still, the phenomenon of franchise flipping continues to represent another important strategy employed by franchise networks. Implementing measures such as transfer approval standards, right of first refusal (ROFR) clauses, or valuation expectations can provide franchisors the resources to ensure the health of the franchise network.

Are you prepared for the next chapter? As franchise development consultants for more than 30 years, FranSource helps clients understand and build comprehensive franchise systems, whether it’s a concept launch, a new unit, or a franchise flip. Contact us today to prepare your franchise for any opportunity that comes knocking.