Franchise Operators Must Get Creative to Tackle Expansion Challenges

In preparation for an upcoming panel discussion at November’s Restaurant Finance & Development Conference in Las Vegas related to the cost and feasibility of new store openings, Matt Kramer of Century Partners Real Estate reached out to 1,300 past attendees to get feedback on what they saw as the biggest challenges to expanding. Century Partners is a commercial real estate firm specializing in capital markets, development and tenant advisory.

After surveying 25 people across the sector, including operators and franchisors of brands such as Zaxbys, Carl’s Jr/Hardee’s, Taco John’s, Bobby’s Burgers, Whataburger, Wingstop, Scooter’s Coffee, Hawaiian Bros, Dunkin’, 7 Brew and many others, in addition to private equity groups, the feedback revealed common hurdles shaping today’s quick-service restaurant expansion landscape.

Costs are universal pressure point

Across virtually every respondent, almost all agreed that the cost of building new locations has far outpaced sales growth and increases in EBITDA, or earnings before interest, taxes, depreciation and amortization.

Nearly all participants agreed the total project cost—not just rates or capital availability—is the decisive factor in determining whether an expansion “pencils.” In some cases, operators noted that shaving $100,000 off a buildout could make the difference between moving forward or shelving a deal.

With fierce competition for the traditional prime pads in front of major anchors like Walmart, “ideal site selection and accurate sales forecasting have become critical components for successful expansions—and franchisees are doing deeper due diligence before pulling the trigger,” Kramer said.

Permitting delays add friction

Respondents also highlighted governmental delays in permitting as a mounting challenge, citing the pandemic-driven shift to remote work as a reason for slow approvals for fire, sewer and utility connections. Instead of supply chain issues, the pain source has shifted to local bureaucracy.

“For operators eager to move quickly, these delays threaten project timelines and capital efficiency,” Kramer said.

The lowest-cost strategy

Many operators are turning to second-generation sites as a way to expand more efficiently. Re-tenanting existing restaurant footprints offers a quicker path to cashflow through lower upfront costs and accelerated approvals, Kramer said.

According to him, sale-leasebacks, or SLBs, remain a widely used tool to free up working capital, with some respondents exploring reverse SLBs—funding and selling the property before it even opens—as a way to minimize entry costs.

“In today’s high-rate environment, these creative structures often represent the cheapest path to new stores,” Kramer said.

Solutions for operators

“We’ve taken an active approach to creatively solving these challenges, which include SLBs, reverse SLBs,” conventional and U.S. Small Business Administration loans, “along and direct private funding,” Kramer said. “Through these approaches, we’ve been successful in helping operators open over 100 stores in the last five years.”

Kramer noted Century Partners recently provided real estate capital on a number of projects, including five funded by a mix of SBA and conventional and reverse build-to-suit capital for a 7 Brew operator. Others include: $16 million for a Whataburger operator; $20 million for Wendy’s operator; $35 million for a Freddy’s operator; and $70 million for gas and convenience store operator

Operators, franchisors and investors remain committed to growth, but the path forward requires sharper pencils, creative deal structures and a renewed focus on fundamentals. Costs are high, permitting is slow and sites selection is more critical than ever.

“Opportunities exist for those willing to adapt, particularly in leveraging second-gen spaces and capital markets tools to bridge the gap,” Kramer said.