In most cases, the financial health of a franchise is partly based on the corporate backing it receives from a parent company. Most franchisees pay a significant percentage of total revenue toward marketing and advertising resources that the parent company deploys, and benefit from the price agreements that the parent company negotiates with the businesses that supply products to franchises.
Even so, the failure of a parent company doesn’t automatically spell doom for its franchises. Franchises that the corporation owns will almost certainly close their doors, but privately owned franchises can still operate in the wake of their corporation’s failure; and many of them attempt to do so, if only because the franchisee has a Small Business Association (SBA) backed loan to repay.
INDEPENDENT FRANCHISES AS INVESTMENTS
Do franchises that lack corporate backing make bad triple net property tenants? Ultimately, the answer depends on the franchise in question. For example, the Bennigan’s chain of restaurants will remain in business until the assets of its failed parent company, Metromedia Company, are liquidated. Because the restaurants are slated to close at some point, you probably wouldn’t want them as tenants.
On the flipside, investing in an independent franchise such as Ground Round might not be a bad idea. After the franchise’s parent company closed, 72 franchisees formed a cooperative to bid for the restaurant’s trademark, which they acquired for $4.85 million. There is no reason why a Ground Round franchise that is going strong wouldn’t make a good triple net real estate tenant.
PERFORMING A COMPLETE ANALYSIS
Franchises that have corporate backing are generally regarded as better triple net property tenants than franchises that lack corporate support, but a business’s viability as a tenant ultimately depends on its finances and what they project for the future. Just because a business lacks a parent company doesn’t mean you should cross it off the list of triple net properties in which you are considering investing.
However, before you invest in a once incorporated franchise that is now independent, you should definitely have an experienced triple net property broker such as Westwood Net Lease Advisors perform an in depth analysis of the business. Using our analytical expertise and experience in the triple net property business, we can tell whether an independent business is a safe investment.