1.19.2011

Yum! Brands, Inc. Selling Certain of its Brands

On January 18th, Yum! Brands, Inc., owner of several franchise systems, including KFC, Pizza Hut, Taco Bell, Long John Silver and A&W All American Restaurants announced that it is selling it’s rights in the Long John Silver Restaurants and A&W All American Restaurants. Yum stated that its primary reason for the sale of the two brands is to focus more on international sales and brand awareness, specifically China.  According to the press release, Yum’s revenues have consistently gone up due to the increased focus on international expansion of certain brands.  The press release stated that Yum’s profits from international and China revenues have increased from 22% in 1998 to 65% today.  “We do not believe Long John Silver’s and A&W All–American Food restaurants fit into our long–term growth strategy,” said David C. Novak, Yum! Brands, Inc. Chairman and Chief Executive Officer. “Accordingly, we have decided to put these two great brands up for sale and we will complete the sale only once the right buyer or buyers have been identified and we can ensure a seamless transition.”  All of the 1630 Long John Silver and A&W All American restaurants are owned by franchisees.

This news follows on a growing trend of franchisors selling all or part of their franchise companies.  Several years ago, Cottman Transmissions purchased Aamco Transmissions.  More recently Carpet Network was acquired by Floor Coverings International.  With this trend, it is important to ask, where does that leave the franchisees of the system that is sold?  The answer depends on a number of factors.  Some of the factors to consider are what are the options presented by the acquiring franchisor?  Is there an option to continue operating under the former franchisor’s trademark?  Is there any option to continue in the business under a new name?  Is the only option presented to convert to the new franchise system?  Within each of these options, a franchisee must consider what the advantages and disadvantages of each are to his or her business.  Remaining under the former name/mark may mean that you will receive no product or support from the franchisor and no further brand promotion.  You may even be left as the only franchisee in the system.  Operating the business under your own name and without any ties or support from a franchisor may be a viable option to a franchisee that has built up a customer base and reputation over a longer period of time.  The costs of “de-identifying” with the former system (taking down signs, trade dress and all evidences of the former brand) may be quite high.  If the franchisee is able to obtain the products necessary to run the business and does not need the support of a franchisor, this may be an excellent option however.  Lastly, converting to the new franchise system has advantages and disadvantages.  The personality of the new franchisor and work ethics may not be compatible with yours.  The cost to convert to the new system (new signs, new trade dress, etc) may be quite costly.  Royalties, advertising fees and other fees and costs may be much higher than what you previously paid.

The sale of a franchise system to a new franchisor, can pose a lot of frightening possibilities for a franchisee in that system.  The advice of experienced franchise counsel like the Spadea Lignana LLC can help clarify and evaluate each of the options to make an informed decision.

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